In this Q&A session with members of Babson College Fund, Mohnish Pabrai discusses how he changed his investment strategy to find more 100 Baggers. Here’s an excerpt from the session:
Pabrai: I went through a a significant change on my thinking last year on that.
So for most of my career as a professional investor I took the approach of trying to buy a dollar bill for 40 or 50 cents, or less, and sell it for 90 cents or a dollar, kind of capture that arbitrage.
And hopefully if the intrinsic value went up in that period then it could be more than a 2X. Or if I bought it at like for example 20 cents on a dollar it could be a four or five x like in the during the financial crisis those commodity plays were pennies on the dollar.
The change in thinking I went through last year was to switch from looking at these undervalued businesses to looking at great compounders.
And the one difference is that I’ve made many investments in the past in great compounders but the problem was that they would get to full price or maybe even get to a little bit overpriced, and I would see it as risky to keep holding and I’d want to go put it into some other investment.
Of course the negative with that is that in taxable accounts, it’s tax inefficient. And in great states like Massachusetts and California we have even more extreme results because of all the high state income taxes. So it’s very tax inefficient if you are in taxable accounts.
And the second is that if you can identify businesses with very long runways. That you can buy even at small discounts to intrinsic value, and may not be 50% off, and then you are right on the runways and the long-term value creation, then those can turn into 10 Baggers or 100 Baggers.
And in those scenarios just a couple of positions can make a big difference.
You can watch the entire discussion here:
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