Fortunately, you don’t have to cough up 6 figures to learn. You can read, think about, and apply the words of other people who have successfully done what you’d like to do.
Someone who has done exactly that is famous value investor Mohnish Pabrai.
Growing up in India, he experienced the lowest of poverty. At 30 years of age, he was exposed to investing and heard about Warren Buffett for the first time. His life has never been the same ever since.
Mohnish Pabrai has some excellent thoughts about investing that are worth any serious investor’s consideration. There is much wisdom in what he has to say.
Let’s look at three of his quotes, and explore the wisdom hidden underneath his words:
1. Investing Is a Business
“Entrepreneurs are great at dealing with uncertainty and also very good at minimizing risks. That’s the classic great entrepreneur.” – Mohnish Pabrai
Too many people view investing as “something on the side” that they do occasionally. They don’t take it serious enough to get serious results.
When Mohnish Pabrai speaks here of entrepreneurs, notice he is speaking to the common dilemmas of investors – uncertainty and risks.
His words reveal that he doesn’t view investing as a side hobby. He views it as a business.
Anyone seriously looking to make a substantial income would do well to develop the mentality that this is a business. It is professional. It requires work, study, research, and patience – just like the development of any other business.
“Investing is most successful when it’s most businesslike.“
Take investing seriously and you will end up seeing some serious returns.
2. You Can’t Accurately Predict the Future
“Industries with rapid change are the enemy of the investor. Tech businesses, particularly biotech, is a problem from that point of view. All industries work with change, but you should ideally be investing in businesses with a low rate of change, not a high rate of change.” – Mohnish Pabrai
In the most general sense, value investing means buying a stock for less than its true intrinsic value.
A value investor determines a stock’s true intrinsic value by projecting out all the cash that the business will generate from now into the future, and then discounting that cash back to the present day.
So whenever you make an investment, you are also making a prediction about the future.
There are some people who believe they can accurately predict the future. These people build complex models and buy stocks based on the assumption that their prediction about the future will come true.
Then there are people who believe that the future is inherently unpredictable, no matter how good your current information is. These people do not make complex models. They buy stocks that are so undervalued, that any prediction about the future can be wildly off yet they will still make money off of their investment. These people, of course, are value investors.
As Ben Graham wrote in The Intelligent Investor:
“The more dependent the valuation becomes on anticipations of the future… the more vulnerable it becomes to possible miscalculation and serious error.”
This is why value investors only invest when they have a margin of safety. They may make a prediction about the future, but they know that they will probably be wrong. The margin of safety protects them even when they are wrong.
This is why Mohnish Pabrai said that “industries with rapid change are the enemy of the investor”. It makes it that much harder to predict that future and to calculate the intrinsic value of a stock. Therefore, if you invest in a tech stock, you will need a HUGE margin of safety. If you invest in a business that operates in a stable industry, you can invest with a smaller margin of safety.
3. Patience is Key
“You don’t make money when you buy stocks. And you don’t make money when you sell stocks. You make money by waiting.” – Mohnish Pabrai
Finally, Mohnish Pabrai tells us that investing is a waiting game. According to him, you don’t make money when you buy a stock and you don’t make money by selling it. You make money by investing in undervalued stocks, and then waiting for the stock’s price to converge with its true intrinsic value.
Pabrai is also saying here that you make money by waiting for the right investment to come your way.
Other famous value investors think the exact same way.
“The stock market is a no-called-strike game. You don’t have to swing at everything – you can wait for your pitch. The problem when you’re a money manager is that your fans keep yelling, ‘swing, you bum!’” – Warren Buffett
“What’s nice about investing is you don’t have to swing at pitches. You can watch pitches come in one inch above or one inch below your navel and you don’t have to swing. No umpire is going to call you out. You can wait for the pitch you want.” – Warren Buffett
When you investing, it is wise to approach it seriously. Treat it like a professional. Put on your entrepreneur hat because your investing is a business. Treat it like one and it will surely treat you well in return, literally.
Remember that you can’t accurately predict the future. Even “sure things” have probabilities of less than 100%. We see this happen time and again (for example, the 2016 U.S. Presidential Election…). Recognize this and invest with a margin of safety.
Finally, be patient. As Vanguard’s Jack Bogle liked to say, “Don’t do something! Just stand there!” Wait for the right investment to come your way, and then when it does wait for the market to realize the stock’s true intrinsic value.
A comprehensive value investing framework for the individual investor. In a straightforward and accessible manner, Mohnish Pabraid lays out the powerful framework of value investing in The Dhandho Investor. Written with the intelligent individual investor in mind, this comprehensive guide distills the Dhandho capital allocation framework of the business savvy Patels from India and presents how they can be applied successfully to the stock market. The Dhandho method expands on the groundbreaking principles of value investing expounded by Benjamin Graham, Warren Buffett, and Charlie Munger.
Investing is all about common sense. Owning a diversified portfolio of stocks and holding it for the long term is a winner’s game. Trying to beat the stock market is theoretically a zero-sum game (for every winner, there must be a loser), but after the substantial costs of investing are deducted, it becomes a loser’s game. John C. (“Jack”) Bogle is the founder of the Vanguard Group and creator of the world’s first index fund, and The Little Book of Common Sense Investing is a top recommendation of Warren Buffett’s.
There’s actually a funny story that when Jack Bogle first met Warren Buffett, Jack recognized Warren, went up and introduced himself, and he said to Warren, “you know the thing I really like about you is you have rumpled suits just the same as I do” – and Jack and Warren have been good friends ever since.