During this interview with the Treasury Elite Series, Mohnish Pabrai explained why investors get in the way of themselves. Here’s an excerpt from the interview:
Pabrai: As you go towards more advisors and more sophisticated strategies the odds of beating the simple index go down.
Charlie Munger says that if he lived in Peoria, Illinois and he owned the McDonald’s franchise, and he owned the Ford dealership, and he owned the best apartment building in town. Let’s say he owned those three assets, he said he’d be happy putting one third of his wealth in each of those and be done with it.
So when you look at that type of allocation one can argue that it’s not geographically diversified, which is true because it’s all sitting in one town. But the odds are extremely high that he would end up with a great result.
So I think people get in the way of themselves by overly complicating things. So I would say the default should be an index, and then if you run into something which is just a no-brainer, that is better than the index, or whatever else.
You’re able to buy a McDonald’s franchise at five times earnings or something. You could take some of it and put it into that franchise for example.
So I would say make the default the index and then anything else you know the bar is a lot higher.
You can watch the entire discussion here:
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