Mohnish Pabrai is one of the most renowned value investors today, known for being one of Warren Buffett's best disciples and for his excellent returns on the stock market over the past few decades. His investment strategies can bring value to all investors, from beginners to experts, especially during economic recovery periods.

In this article from Hapi, we explain who he is, what his investment principles are, and how he makes decisions to buy stocks.

Who is Mohnish Pabrai?

Pabrai is the founder of Pabrai Investment Funds (PIF), a fund inspired by the original investment principles of Warren Buffett (and other value investors such as Charlie Munger, Seth Klarman, and Joel Greenblatt). His fund has outperformed the S&P 500 over the last two decades, with an average compound return of 15.5% year-over-year.

His fund started in 1999 with just $1M, after selling TransTech for $20M, his IT consulting firm. He is now heavily involved in philanthropy through the Dakshana Foundation, an organization focused on alleviating poverty through the education of talented low-income students. He is also the author of two books on Value Investing: Dhandho Investor and Mosaic: Perspectives on Investing.

How does his investment philosophy work?

As a disciple of Buffett, Pabrai is a proponent of Value Investing and believes that stocks are not just symbols that move on a chart but real parts of a business you become an owner of. For that reason, he follows a few fundamental principles.

1. Invest with a margin of safety

Value Investing involves selecting high-quality, undervalued stocks below a margin of safety, which refers to the difference between a stock's price and its intrinsic value. Mohnish’s mantra is, "If heads, I win a lot; if tails, I don’t lose much."

2. Stay within your circle of competence

For Pabrai, it’s essential to stay within the areas you understand and know in detail what you own and why you own it. This is known as the circle of competence. Within the circle, he reads books, earnings reports, and the most relevant industry publications. In other words, ensure you have a great understanding of the companies you invest in.

3. Buy stocks for the long term

This investment philosophy includes elements like Buy-and-hold, which means keeping your stocks in your portfolio for the long term, regardless of temporary market fluctuations. The ideal approach is to buy a business and ignore its daily movements. Most negative news is temporary.

He also advocates applying Dollar-Cost Averaging at all times, especially during a crisis. Additionally, he recommends avoiding leverage at all costs.

4. Build portfolios with few businesses that have strong competitive advantages

Pabrai believes it’s better to have a portfolio with a small selection of high-quality stocks than one with many average-quality stocks. These stocks should have high returns on invested capital, low leverage, a capacity for constant innovation, and an ability to expand into new sectors.

His approach is to behave as though he is a co-owner of the companies in which he invests.

5. Have patience

All of the best investors in history have one quality in common: control over their emotions. While selecting stocks through solid analysis is important, nothing is more valuable than avoiding impulsive decisions in the market.

Mohnish’s fund lost nearly 70% of its value during the Great Financial Crisis, yet he maintained his conviction and calmly bought stocks aggressively during the downturn, allowing him to outperform the major indices in subsequent years.

For that reason, he shares Charlie Munger’s advice that money is not made in the buying or selling but in the waiting.

Mohnish Pabrai and his Dhandho Checklist

The Dhandho checklist (which means efforts to create wealth) presented in his latest book has gained much popularity among investors. Pabrai based this list on studying the mistakes of the most well-known investors.

It is a useful tool for selecting suitable investments. The main advantage is that you can gain much knowledge about a stock compared to the time it takes to evaluate it with the list.

Although it has 150 questions, about 70% fall into these three categories: financial stability or leverage, management and shareholders, and competitive advantages.

The following questions are usually central to making investment decisions:

• Can we understand the industry and the company? Is it within our circle of competence?
• Do we know the company's intrinsic value, and can we predict with high probability how it will perform in a few years?
• Is the stock trading at a significant discount (greater than 50%) below its intrinsic value?
• Would we be willing to invest a large portion of our capital in the company? Are the risks minimal?
• Does the company have a sustainable competitive advantage (commonly referred to as a moat)?
• Is the company led by capable and honest managers?

What is his investment strategy for 2024?

As in the past, Mohnish Pabrai remains faithful to his investment strategy, though he continues to learn over time. His Value Investing principles include investing with a margin of safety, staying within your circle of competence, buying stocks for the long term, and seeking companies with strong competitive advantages.

Before buying a stock, he recommends conducting thorough analysis using a checklist, and once you invest, all you need to do is be patient. Market declines are only temporary reductions in capital; the most important thing is to avoid panic. These are usually the best times to invest and improve your portfolio.

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