During his recent interview with students at the Rotman School of Management, Mohnish Pabrai discussed the investing concept of ‘circling your wagons’. Here’s an excerpt from the interview:
Pabrai: The concept that matters a lot is the concept of ‘circling your wagons’.
So you don’t really know a business till you invest in it, and it really takes you a few years of ownership to really understand the business.
You may have some ideas about the business before. It’s when it drops 40% in price after you buy it, that’s when you get a real education over the business is actually all about and what it’s worth and everything else.
Your analysis will be extremely good at that point. It won’t be so good before you buy the business, it would be really really good when it drops 40%, you’ll be amazing at it.
So the important thing is that all of us will find ourselves in the happy situation every so often of holding a small interest in a great business and when that happens what you need to think about… the portfolio, you need to think about the portfolio in the form of a few concentric circles.
Okay so at the very center of the circle with a bunch of wagons circling around. If you go back to Rakesh Jhunjhunwala, his Titan Industries. And the next round of positions with a bunch of wagons around it would be bets that he has less conviction on.
He might have like three or four others that he feels pretty good about but not as good as Titan.
So he puts… they’re in the next circle. And then you might put the next set of positions in the next circle.
So one of the things I would encourage you to do is that the portfolio you’re inheriting try to see if you could put them in those different circles.
And so we want to make sure that the business or the businesses that we have that are just tremendous go at the center, and the center actually needs to be a very rarefied space.
You can watch the entire discussion here:
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