Buying a stock is far more complicated than what most people think as it includes understanding a business and calculating the value of a company. So, most investors are better off buying the index or investing in a smart fund manager, value investor Mohnish Pabrai said.
“Let buying a stock be an exception rather than the norm,” he said on BloombergQuint’s special series Alpha Moguls. And it has to be a no-brainer. If he can’t describe an idea to a seven-year-old, it’s a reject.
But if buying is complicated, “selling is 10 times more complicated”. One of the things an investor has to decide to sell is looking far into the future. Most people, including company insiders, have a very fuzzy idea about the future, Pabrai said.
A great company, with a great growth and great management, should be given some rope. And sell such a company not when it’s fully priced or when it is overpriced, but when it’s egregiously priced.
Yet, it’s difficult to gauge all that before investing. “You learn about a business only after you buy it,” He cites his investment in cement-to-commodities company Rain Industries Ltd. as an example. And buying the stock at no premium to its earnings estimated in 2019 was a no-brainer.
How to zero in on such bets? Multiple models working towards the same directions is one indication. Pabrai takes the example of real estate in Mumbai.
Mumbai is unique because there is a scarcity of supply. Demonetisation, Goods and Services Tax and Real Estate Regulation Act ensured that the market imploded, he said. Standardisation of rules for slum and society redevelopment adds another dimension.
“Unscrupulous and indebted developers are struggling for oxygen, and those who played by the book are succeeding now,” he said. “Mumbai will be rebuilt over the next few decades, and the few trustworthy players will reap the benefits. Constrained supply, very valuable land and the need to tear down the city are the factors that make real estate a multi-decade opportunity.”
I hope I am smart enough to not sell any of the real estate holdings we have.Mohnish Pabra, Managing Partner At Pabrai Investment Funds
Yet, Pabrai doesn’t want to predict what happens in 2018. He surely doesn’t see screaming bargains as the valuations are stretched. And since he hunts for no-brainers. There are multiplier opportunities in themes like asset management, but he hasn’t found bargains. And he is in the camp that believes in staying away from bitcoin.
For those interested in from where he draws inspiration for his ideas, he suggests two books: investor Ray Dalios ‘Principles’ and self-made billionaire-entrepreneur Sam Zells’ ‘Am I Being Too Subtle’.
Watch the full conversation here: