{"id":6956,"date":"2024-02-16T13:21:12","date_gmt":"2024-02-16T07:51:12","guid":{"rendered":"https:\/\/aayushbhaskar.com\/?p=6956"},"modified":"2024-02-17T20:01:42","modified_gmt":"2024-02-17T14:31:42","slug":"mohnish-pabrai","status":"publish","type":"post","link":"https:\/\/aayushbhaskar.com\/mohnish-pabrai\/","title":{"rendered":"7 Great Investing Lessons from Mohnish Pabrai","gt_translate_keys":[{"key":"rendered","format":"text"}]},"content":{"rendered":"

Nowadays, investing is something that everyone wants to do as it is one of the best ways to create wealth.<\/p>\n

Being an investor, you should know that the stock market is indeed the best way to earn money, but it definitely can put you in a financial crisis if you don’t do the right research for the stocks you’re investing in.<\/p>\n

Speaking of stock market research, many investors consider Mohnish Pabrai \u2013 An Indian-American businessman, investor, and philanthropist, their idol and follow his investment path to succeed in their stock market investment journey.<\/p>\n

Mohnish Pabrai founded the Pabrai Investment Funds and Founder & CEO of the Dhandho Funds.<\/p>\n

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Though not a household name in the West, Mohnish Pabrai is the Midas of Indian investing.<\/p>\n

His record of spotting promising growth companies, identifying their flaws, and waiting for the market to recognize their potential has made him one of the most respected investors.<\/p>\n

Let\u2019s now learn some investment lessons from Mohnish Pabrai\u2019s investing approach.<\/p>\n<\/div>\n

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1. Aim For Low Risk, High Returns<\/strong><\/h3>\n

Being an investor alongside an Entrepreneur, Mohnish always believed to be an investor playing on the safe side. He says that entrepreneurs are great at dealing with uncertainty and are also very good at minimizing risk.<\/p>\n

Being an entrepreneur, he learned one thing, which is to minimize risks from every sector he invested <\/span>in<\/span><\/span>.<\/span><\/p>\n

So, from the stock market<\/a>, if you can’t make more money, you can at least minimize the risks involved in your investment by playing safe.<\/span> Either way, you’re not earning much, but not even losing. Though it is safe to play, I would like to call this investment approach a smart one.<\/span><\/p>\n

Pabrai uses the Gujarati word “Dhandho<\/span>“<\/em><\/strong> which means endeavors that create wealth.<\/p>\n

More specifically, in the context of investing, he is referring to high-return business ventures with low downside risk. These are businesses where even if things go wrong, you can still make money.<\/span><\/p>\n

Dhandho investors don’t try to be clever or outsmart anybody. They <\/span>simply<\/span><\/span> buy businesses with a margin of safety \u2013 they pay a low enough price that if <\/span>they’re<\/span><\/span> wrong,<\/span> they won’t lose much.<\/span> If they’re right and the market eventually realizes it, there are plenty of<\/span> upsides.<\/p>\n

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He compares his investment approach to the two sides of the coin by saying<\/span>. \u201cHeads I win, tails I don’t lose much.\u201d<\/p>\n

This approach can be comprehended<\/span> as low risk,<\/span> and high uncertainty because<\/span> even if they don’t get much profit from the investment, they can at least expect to get minimal risks.<\/p>\n

In short, being a business personality, Mohnish Pabrai believes in investing in “low-risk, high returns” stocks rather than “high-risk, higher returns“.<\/span><\/p>\n

2. Investment is All About Waiting<\/strong><\/h3>\n

Mohnish says,<\/p>\n

“The single biggest advantage a value investor has is not IQ. It’s patience and waiting. Waiting for the right pitch, and waiting for many years for the right pitch.”<\/strong><\/em><\/p>\n

-Mohnish Pabrai<\/strong><\/em><\/p><\/blockquote>\n

In the last two decades, the stock market has seen its share of<\/span> ups and downs. During this time, there<\/span> have been many occasions when the market has fallen by more than 10 percent in one day.<\/p>\n

However, investors like Mohnish Pabrai are not worried about such volatility in the market. They know that if they buy good stocks at the right time and hold them for a long<\/span> period, they can give unimaginable returns.<\/p>\n

Letting your investments grow through compounding can make you a lot of money; investors whose assets have grown exponentially have either<\/span> forgotten about the stocks in which they made their initial gains, or have used those returns to diversify into other assets<\/span>.<\/p>\n

The reason investors don’t get the full<\/span> value of compounding is that<\/span> every time the stock goes up, their mind starts playing games with them. The stock<\/span> that was a small part of the portfolio<\/a> suddenly<\/span> becomes a big part and invokes fear or greed depending on whether one is looking at it from a gain or loss perspective.<\/p>\n

This<\/span> can cause you to make all sorts of<\/span> mistakes, like selling after a large<\/span> rise in price (because your mind says it’s too big) or not selling<\/span> when you should (because your mind says it’s still too small).<\/p>\n

“You don’t make money when you buy stocks. And you don’t make money when you sell stocks. You make money by waiting.”<\/strong><\/em><\/p>\n

-Mohnish Pabrai<\/strong><\/em><\/p><\/blockquote>\n

3. Mistakes are the Best Teachers<\/strong><\/h3>\n

Like other successful stock market investors, Mohnish Pabrai also recommends learning something from mistakes and not repeating them next time.<\/p>\n

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Mohnish says that mistakes are the best teachers. One does not learn from success. It is desirable to learn vicariously from other people’s failures, but it gets much more firmly seared in when they are your own.<\/p>\n

Through this, he points out that, being an investor, you need to accept your mistakes whenever you face a downfall in the stock market. Because in the stock market, there are times when you’re right and when you’re wrong. For example, a stock line can go 10% down and even 50% up, so it’s truly beyond your expectations.<\/p>\n

T<\/span>here’s only one thing that can help you succeed in the stock market, and that is your positive attitude toward learning from your mistakes.<\/span><\/p>\n

So, to be the investor containing a higher profit earning accuracy rate, you should analyze your downfalls and other people’s downfalls and find higher profit-gaining stocks, which are the ones with lower risks, to find your right<\/span> investment.<\/p>\n

You should consider<\/span> your mistakes as an opportunity to remediate your downsides and find success in your next investment.<\/p>\n

4. Play across Your Understanding Areas<\/strong><\/h3>\n

In the stock market, your interest in the company plays a major<\/span> role in helping you gain profit. That’s why Mohnish Pabrai says,<\/p>\n

“The only way one should<\/span> buy stocks is if you understand the underlying business. You stay within the circle of competence. You buy businesses you understand.”<\/strong><\/em><\/p>\n

-Mohnish Pabrai<\/strong><\/em><\/p><\/blockquote>\n

You should select the company you’re most interested in, find the investors that are<\/span> making profits from such stocks, follow their investment approach, analyze points where they make mistakes, and make your right move at the right time and write your investment saga.<\/p>\n

The best investors can look at a company and assess its competitive advantages by analyzing what business it’s in<\/span>. This<\/span> may sound obvious, but<\/span> many people make the mistake of thinking that a business is defined<\/span> by its products or services. They confuse a firm with its industry.<\/p>\n

In practice, however, the industry in which a company competes is often less important than how it competes within the industry.<\/p>\n

For example, companies that manufacture integrated circuits are all in the same industry–semiconductors–but they compete on very different terms. Some sell their products to computer makers such as Dell; others sell to electronics manufacturers such as Nokia; still, others <\/span>sell<\/span><\/span> to automobile companies such as General Motors.<\/span><\/p>\n

Those differences mean that each company faces different risks and has different prospects for growth and profitability.<\/p>\n

Even within a single industry, there can be a significant disparity among individual companies’ prospects.<\/span><\/p>\n

So, always play in the areas<\/span> you find your maximum interest in and in which you can use your analytical expertise.<\/p>\n

5. Always Make A List of Questions to Investigate Stocks<\/strong><\/h3>\n

For those who are<\/span> new to investing, it is hard to know where to start to build your knowledge. The best place to start is not with stocks, but with businesses. And the best way to learn about businesses<\/span> is by asking questions.<\/p>\n

Make<\/span> a list of questions and use it every time you consider buying stock in a company. It will help you avoid many mistakes and focus on what matters.<\/p>\n

Mohnish Pabrai, in his book \u2013 ‘The Dhandho Investor’ listed a set of questions that you should use to investigate stocks you’re interested in buying.<\/p>\n