Mohnish Pabrai is a name many investors would never have heard of.
Yet he is one of the true investing legends. His long-only shares fund has returned a total 517% to investors since its inception in 2000, compared to 43% for the US S&P 500 index.
Interestingly, his fund apparently doesn't charge management fees, but instead takes 25% of returns that are greater than 6%. A lesson many active Australian fund managers should put into practice in my opinion.
Here are a number of his most important lessons.
- Read Warren Buffett. According to Pabrai, he started by reading Warren Buffett's letters to Berkshire Hathaway shareholders, and other books on Buffett.
- Treat shares as part ownership of businesses, much as Buffett recommends.
- Practice patience. Pabrai is following in the footsteps of Charlie Munger, where "money is made not in the buying or selling but in the waiting". He says if he can find a couple of investment ideas a year, that's plenty.
- Follow a checklist when researching companies. Some estimates suggest Pabrai's checklist is over one hundred check points. One group relates to leverage (or debt levels), while a second group considers the durability of the business's competitive advantage.
- Where does he get most of his ideas from? Where else but the financial filings of other value investors he admires, like Berkshire Hathaway, Seth Klarman's Baupost Group, and Marty Whitman's Third Avenue.
The first three steps are relatively simple for investors to understand and put into practice. Of course reality is the hard part, but being patient can be learnt over time.
If you want a short investing checklist, here's one written by David Parmenter, outlining a Warren Buffett style 'Investment Checklist". Pabrai also suggests that investors can build their own based on their own history of failures, "Rub your nose in your own failures," he urges.
Where to get ideas from? Easy. First port of call is Motley Fool Share Advisor of course. If that's not enough, have a read through the reports of some fund managers and see what they are buying.
One I admire is Pie Funds Management – a small New Zealand based fund manager, which has consistently outperformed the market. Here are some of the stocks Pie Funds currently hold and think have a great future ahead: Titan Energy Services Ltd (ASX: TTN), M2 Group Ltd (ASX: MTU), Vita Group Limited (ASX: VTG), WDS Limited (ASX: WDS) and Vita Life Sciences Limited (ASX: VSC).
If that's not enough, here's an even better idea for you…
