Mohnish Pabrai: The Benefits Of Being A Focused, Solo Investor

In his book – The Dhandho Investor, Mohnish Pabrai explains why a critical law of investing, as demonstrated by Warren Buffett, is the importance of a small team size, ideally just one person. This approach allows for decisive and bold investments, exemplified by Buffett’s decision to invest 40 percent of the Buffett Partnership’s assets into American Express in 1963.

Large teams, even with highly intelligent and capable members, are less likely to agree on such bold moves and are more risk-averse.

Historical examples, such as Buffett’s investments in the Washington Post and USG, show that individual decision-making can lead to significant returns, even amid initial losses.

Here’s an excerpt from the book:

If there were such a thing as the Laws of Investing, they would have been written by Graham, Buffett, and Munger. A small team size (ideally one) would be one of these laws. Why is an investment team size of one so critical?

Let’s take the example of Buffett putting 40 percent of the Buffett Partnership’s $17 million in assets into American Express (AmEx) in 1963 (see Chapter 10—“Few Bets, Big Bets, Infrequent Bets”). As Charlie Munger says, “Invert, Always Invert.”

Let’s assume that there is an investment fund with $1 billion in assets and 10 investment professionals. Each of these individuals has an outstanding investing record and a 150+ IQ, and their modus operandi is that an investment only gets made when all 10 are in agreement.

There is simply no way our 150+ IQ team of 10 would all (1) agree that AmEx was a strong buy; or (2) ever be willing to bet 40 percent of fund assets on this deeply distressed business—even if, by some miracle, they reached consensus to make the investment.

Finally, even if this team did agree to put 5 percent of assets into AmEx, what would they do if the price declined another 30 percent? This is not a hypothetical question. In 1973, when Buffett bought a large stake in the Washington Post, he saw the price cut in half after he had acquired most of his stake.

More recently, Berkshire saw the price of USG stock go from $18 to less than $4 (a 75+ percent drop) after they had acquired their stake. It later rose to over $120.

As you reduce the size of this 10-person team, the likelihood of making these bets rises. As the odds rise, the annualized returns are likely to rise as well. These returns are likely at their highest when you have a single, focused, value investor at the helm.

You can find a copy of the book here:

The Dhandho Investor – Mohnish Pabrai