In this Q&A session with MBA students at Columbia Business School, Mohnish Pabrai discusses the importance of assessing potential risks and outcomes before making investments. He acknowledges that all businesses carry some level of uncertainty and a small probability of failure.
Pabrai views investing as a game of probabilities, striving to maximize the chances of significant gains while minimizing the risk of permanent capital loss. He prefers situations where, even if things go wrong, he breaks even or incurs minimal loss, and if successful, achieves substantial returns. However, he stresses the importance of avoiding investments with a high risk of total loss, even if they offer high potential rewards.
Here’s an excerpt from the session:
Pabrai: Before the investment is made, try to figure out what could go wrong and, if those things go wrong, what could happen to our investment results with the position.
Generally speaking, we try not to go into situations where… so investing is probabilities. Any business has some probability of a zero. It could be very small, but it’s not non-existent.
Every business has uncertainty in the future and could have serious difficulties in the future, which may not be predictable. We can’t just say that something is an absolute. Investing is the game of probabilities.
What we do want to do is maximize the probabilities of a good home run and minimize the probabilities that we have a permanent loss of capital. So, if things don’t work and I end up with approximately what I started with, that’s a great outcome. I would take that bet all day long.
If things do work, then I get a multibagger. If that’s the kind of equation I’m looking at, then that equation is very attractive.
If the equation is that there’s a significant probability of a zero coupled with a very high probability of a multibagger, that’s not of that much interest.
We definitely want to have downside protection.
You can watch the entire discussion here:
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