Mohnish Pabrai: “We can do really well in the business even if we don’t understand 98% of the markets and the companies in them”

Here’s a great recent interview with Mohnish Pabrai and the folks at ET. During the interview Pabrai provided a number of valuable insights on his value investing approach. Here are some excerpts from that interview:

High-uncertainty businesses coupled with low-risk result in high returns…

Pabrai: It’s very interesting because stock markets have a perspective that businesses should have extreme predictability. They should be able to tell us every quarter what’s going to happen and they should just march northward every quarter in a straight line.

Unfortunately, the real world doesn’t work like that. The real world is messy and businesses don’t go this way. They have their ups and downs. The thing is that when a business has a hiccup or it misses a quarter or something the markets think all hell has broken loose. Where in reality it just might be part of the natural way a business runs. Markets hate uncertainty. When you have high uncertainty in a business coupled with low-risk the end result is high returns.

If you have the combination in a particular business where uncertainty is high and risk is low, generally speaking, that’s a situation you should be worth or willing to dig into and we had that situation for example in India maybe 15 or 16 months ago in the real estate space. That’s the example of classically low-risk high uncertainty.

You can still do well in investing by focusing on the 2% of businesses that you understand…

Pabrai: There are one hundred other ways to invest. One doesn’t need to do it by looking at the past great compounders. The investing business is a very forgiving business. We can do really well in the business even if we don’t understand 98% of the markets and the companies in them. It’s very important to stay within your circle of competence.

You can watch the entire interview here:

(Source: YouTube)