In a recent interview with Capital Compounders, investor Mohnish Pabrai shares hard-earned wisdom about recognizing and holding onto great businesses—especially compounders. He emphasizes that true understanding of a company often comes after buying it: “You really only truly understand a business after you own it.” While some businesses like Google or MasterCard are “obvious” winners from the outset, Pabrai notes that for most companies, “you are going to really learn about them after you own them,” sometimes over several years.
He revisits the story of the “Nifty-Fifty,” a group of high-quality blue-chip stocks in the late 1960s and early ’70s—including names like Coke, McDonald’s, and Kodak—that investors bought “with no price discipline,” believing them to be permanent holds. But during the 1973–74 crash, “the Nifty-Fifty got taken out back and shot.” Despite their pedigree, their valuations collapsed—Coke, for example, “was down to like six times earnings.”
To highlight the power of long-term compounding, Pabrai offers a hypothetical: Suppose Walmart, which IPO’d in 1970 or 1971, had been part of the Nifty-Fifty and made up just 2% of the portfolio, while the other 98% of holdings went to zero. Even with that catastrophic failure rate, “you would have blown out the S&P.” His point? “Investing is an extremely forgiving business,” where “a 98% error rate has been forgiven.” The real key, he says, is “letting the great businesses stay in your portfolio.”
Pabrai reflects candidly on his own mistakes, admitting, “One of the dumbest things you can do” is sell great businesses because they look expensive. He shares a personal example: his 2012 investment in Fiat Chrysler, which at the time had a $5–6 billion market cap, 80% of which was Ferrari. Today, Ferrari’s market cap alone is $90 billion. Had he simply held onto the investment, it would now be worth around $900 million, almost his entire fund’s assets. But he sold because Ferrari “looked expensive”—a decision he now calls “really stupid.”
Finally, Pabrai points to the Walton family’s approach with Walmart. Sam Walton passed on his shares to his children before Walmart went public, avoiding estate taxes. At IPO, they held 38% of the business. Over 55 years later, they still own 44%. It’s a powerful lesson in long-term thinking and disciplined ownership: “The absolute key to doing well is letting the great businesses stay in your portfolio.”
You can watch the entire interview here:
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