Mohnish Pabrai: 2-Step Investment Strategy to Spot Major Value Gaps

In this Q&A session with the London School of Economics, Mohnish Pabrai discusses his two step investment process for finding opportunities with significant upside potential. Here’s an excerpt from the presentation:

Pabrai: Yeah I mean I think the the very first question I ask myself when I run into some business, let’s say I see some company on the 13f of some investor I admire is, the first question I ask, is it within my circle of competence?

And a lot of businesses that wiped out when I asked that question.

Now if the business happens to be in my circle of competence then I ask the second question, is it widely mispriced?

I’m not really interested in something that’s selling for $75 a share and is worth $100 a share. That is too Mickey Mouse for me.

So what I’m looking for is it’s selling for $75 a share and maybe it’s worth 300 or 400 or 500 a share, or more.

So the second question I ask myself is does there appear to be a very large gap between price and value?

And of course the world’s a competitive place, so in most cases for the second question the answer is going to be no.

But sometimes the answer might come out yes. Does appear to be a pretty large gap, and then I say okay let’s go down the rabbit hole and let’s try to understand the business better, and what it’s about, and what it’s likely to look like in five or ten years.

And what we might be able to make if you own it and so on, and so that’s the process.

You can watch the entire discussion here: