Mohnish Pabrai: Investors Project Present Circumstances To Infinity

In this Q&A session with members of the Finance and Investment Cell at SRCC Delhi, Mohnish Pabrai explained why investors project present circumstances to infinity. Here’s an excerpt from the session:

Pabrai: I think with investing the reason the error rate is high is because of…. I would say primarily two reasons.

One is that humans have a tendency to basically project present circumstances to infinity. So for example we have a company in the U.S called Nvidia.

And Nvidia just hit a trillion dollar market cap. And it’s up almost like 200% this year and it was five six months, and Nvidia is a great business, it’s a great business.

It’s at the epicenter of the AI boom and a lot of people think that Nvidia will do really well.

I don’t have any position in Nvidia and I’m not suggesting you should go buy the stock but I’m just using it as an example.

So I would say that there’s a lot of euphoria around Nvidia and if one were to do some type of analysis of a discounted cash flow model where you look at the earnings of Nvidia today.

And you do some projections of what you think their earnings are in three years, or five years, or ten years and then you discount it back I think it’d be difficult to justify a trillion dollar market cap.

It would be difficult to come up with a future cash flow stream in the next 10 years or so that would exceed that. I have no idea what would happen to Nvidia but I would just say that what I have noticed in equity markets is that they vacillate a lot between fear and greed.

They tend to at times get very overheated and overvalued and they tend to get really depressed at other times. And because it’s auction driven markets where prices are set by the sentiments of investors there’s a lot of positive sentiment about Nvidia. It’s a great business.

But similar sentiment existed in early 2000s with Microsoft.

You can watch the entire discussion here: