I’ve just finished watching Mohnish Pabrai in his recent interview with the Capital Compounders Show in which he shared a fascinating insight on share buybacks. His discussion on “cannibals”—companies that aggressively buy back their own stock—provides a powerful mental model for investors looking to maximize long-term wealth accumulation.
“I think cannibals is a tremendous mental model,” Pabrai emphasized. He pointed to the Walton family’s increased stake in Walmart, not through direct purchases, but as a result of the company’s consistent buybacks.
“I don’t think they bought shares… I think they’ve sold shares, but Walmart’s bought back stock, and so it’s netted out that they’re higher.” This illustrates the power of buybacks in reducing the share count, effectively increasing existing shareholders’ ownership stakes.
Pabrai’s enthusiasm for this strategy is rooted in the efficiency and compounding effect of well-executed buybacks.
“If you have ownership of a truly great business with great economics, and that business is able to buy back shares at modest valuations… you don’t have the tax leakage of dividends.”
The capital that would have been distributed as taxable dividends instead gets reinvested directly into reducing share count, amplifying the value for long-term holders. “It’s really going to add a lot of turbocharge to your portfolio,” he noted.
He underscored the wisdom of Charlie Munger, saying, “Like Munger used to say, pay attention to the cannibals.” Where companies are sitting on large cash reserves, investors should take notice of those that use their capital efficiently to reward shareholders.
However, not all buybacks are created equal. Pabrai highlighted a cautionary tale: “Eddie Lampert bought back a lot of Sears stock, which was a great way to incinerate wealth.” Sears’ aggressive buybacks could not compensate for its declining fundamentals, proving that buybacks alone cannot rescue a failing business.
Thus, the key to successful buyback strategies lies in two essential criteria: “We have to make sure that it’s a great business, and we have to make sure that the buyback price is at least not overpaying, and, hopefully, it’s at a bargain price.” When these conditions are met, buybacks become a powerful tool for compounding wealth.
For long-term investors, Pabrai’s insights serve as a reminder that share repurchases can be an incredible force in portfolio growth—provided they are executed by businesses with strong fundamentals and at rational valuations. Investors should heed Munger’s advice and “pay attention to the cannibals,” but with the caution that not every company conducting buybacks is necessarily a great investment. When done right, however, the rewards can be substantial.
You can watch the entire interview here:
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One Comment on “Mohnish Pabrai: How to Spot a True ‘Cannibal’ Stock”
You can go on the RTT buyback list. Be wary of the RadioShacks, Bed Baths, Aeropostale, … You want revenue rising and shares falling yearly. Look at short interest, above 10-20. Ask yourself is the company going to be the same or stronger in 10 years.