Circle Of Competence Issue #18
DEPARTMENT OF GENERAL FINANCE
This is just a fantastic interview with Mohnish Pabrai, founder of the Pabrai funds. He is a fantastic investor with phenomenal returns since 1997 (north of 20%+ annually). I am going to write a small bio next week on him, but for now, this should suffice. A few themes and quotes stuck out to me, namely his checklist approach to investing, his no-fee-based incentive fee only system, and his portfolio allocation (ZERO $ in the US!).
Quote on finding good managers in mediocre industries:
"For example, the quality of management, the durability of the moat, and those sorts of things. I’ve learnt that if you get exceptional managers, and even if they don’t have such exceptional businesses that they’re running, they will produce some incredible results. Sometimes jockey bets - paying out for the right jockey, is a great way to go."
This seems to be in direct contrast to Buffett's well-known quote that when good managers tackle industries with bad economics, it's usually the industry's reputation that stays intact. Interesting that Mohnish has found the opposite to work. I think that on a LONG (10+ years) term basis, Buffett's argument probably wins here. But when you have a great operator in a tough industry that has a short term spurt of good performance or growth or capacity constraint, you can have some winners (e.g. insurance).
Another good one on his checklist items:
"The biggest area of why business or investments don’t do well is leverage. Leverage is generally the one that I’ve had the most difficulty with in the past. There are a host of questions related to leverage, debt and that genre. The second area is a toss up between management and ownership or comparative advantage and the durability of the moat. Those three areas, leverage, management / ownership, and comparative advantage / moats, make up 70-80% of my checklist."
On his portfolio concentration: