sasnri20%8 Pabra's 10 commandments for becoming a successul investor Pabrai’s 10 commandments for becoming a successful investor By Anupam Nagar, ETMarkets.com | Dec 17, 2018, 11.43 AM IST comments Eminent value investor Mohnish Pabrai says wealth creation in financial markets ishould be based on M10 Basic Pabrai says investing is @ very inexact science and trying to extrapolate the future of many businesses is an extremely Commandments of Investment Management’ in order to ensure capital protection and growth However, most participants in the investment management business violate these constantly, putting themselves in distress. Pabrai, Managing Partner of the US-based Pabrai Investment Funds, explained these principles in a talk delivered to the students of Boston College's Carroll School of Management. Commandment One: Thou shall not skim off the top Pabrai feels it is wrong to have a fee structure in wealth and asset management, Most money managers take some percentage of fees as a fixed fee and hedge funds typically take away 1-2 per hitpsleconomictimes indiatimes, com!markela/stocksinews/pabrai-10-commandments-fr-becoming-a-successfulnvestoraricleshowi6712385t.oms 1/4sanra018 Patras 10 commandments for becoming 2 sucesstl investor cent off the top and an additional performance fee. He specifically highlights Warren Buffett and Charlie Munger, who practised the art with no fees off the top. Pabrai says investment managers should first practise the art with their own limited assets before managing other people's money. “With the power of compounding, even a small amount of money can become significant over a few years. If you are compounding at anything north of 15-20-25 per cent, which you should be able to do with small amounts of capital, your money will be doubling every 4-7 years. This then gives you the ability to, in effect, live off that base while the assets keep growing,” he says. Commandment Two: Thou shall not have an investment team According to Pabrai, investment management is not a team sport, but is designed to be an individual pursuit. Any two humans are going to have different circles of competence because of which it doesn't make sense for a good investment manager to have analysts in his team. There are good chances that an analyst may come up with some investment ideas, which may just be rejected because of different circles of competence which will not do justice to the analyst. “Secondly, you do not need that many stocks in a portfolio. In a year you have plenty of time to research stocks and find two-three-four that fit the bill," he said. Pabrai said the investment analysis. process is the fun part of the job, which an investment manager will not want to delegate to anyone else, Commandment Three: Thou shall accept I shall be wrong one-third of the time Pabrai says investing is a very inexact science and trying to extrapolate the future of many businesses is an extremely difficult job. He feels four out of 10 businesses will not behave in the future as per expectations as various factors may affect them. So, it must be accepted that even the highest conviction ideas may or may not fulfil expectations. Commandment Four: Thou shall look for hidden 1x price-earnings stocks The veteran investor says it is best to look for stocks based on future earnings or hidden earnings that are trading at a 1x multiple. “When you can buy at this valuation, good things tend to happen. Looking for the hidden PE is a really good exercise,” he says. Sharing his own experience, Pabrai says when he bought Fiat Chrysler, it was trading at less than $5 a share and the company had forecast that by 2018 it would be making about $5 a share. In 2016, it spun off Ferrari, but including that it exceeded the forecast number. The P/E of 1 materialised and the investment increased by 7-8 times in that time. Commandment Five: Thou shall never use Excel hitpsleconomictimes indiatimes, com!markels/stocksinews/pabrai-10-commandmens-fr-becoming-a-successfulnvestoraricleshowi6712385t.ome 214sanra018 Patras 10 commandments or becoming 2 sucesstl investor Pabrai says the use of excel should be avoided in making investment decisions. “The investment process is simple, and you should not take help of an Excel sheet to figure out if something is a great investment. If you cannot figure it out in your head, it can't be a great investment. If you find yourself reaching for Excel, you take a pass,” he advised. Commandment Six: Thou shall always have a rope to climb out of the deepest well Pabrai said one of the greatest lessons he has learnt in the investment business is that there are going to be periods of ups and downs where performance is sometimes going to be great and sometimes not, Businesses are going to always have gyrations and setbacks are par of the course, but there will always be a way to deal with them. Giving his own example, Pabrai says during the global financial crisis, his company hit rock bottom in March 2009 from a peak in June 2007, with funds dropping between 65-70 per cent. But he did not lose hope and found a way to come out of the crisis. He encouraged investors to always have belief in their ability, as there will always be a rope to climb out of the deepest well. Commandment Seven: Thou shall be singularly focused like Arjuna Pabrai says the golden rule for investment management is to have a focus and resolve like that of Arjuna from the Indian epic Mahabharata. “There is a need to have a focus on the business, and only the business,” he said. While looking at a business with a P/E of 1, there will usually be several concerns hanging over it, including macro concems. Pabrai feels if we can look past these concerns, there would be a lot of opportunities. Investors must just focus on these opportunities and ignore the noise around them. Commandment Eight: Thou shall never short a stock Pabrai feels shorting a stock can at most deliver a double, but often can go against an investor. Even experts like Warren Buffett and Charlie Munger have noted that they have always been right on the stocks to short but have always got the timing wrong. “The best you can do is double your money and the worst is you can go bankrupt. This is the opposite of what you want. There is no point in making bets where the highest upside is a double and the highest downside is that you are out of the game,” he said Commandment Nine: Thou shall not be leveraged. Neither a long-term lender nor a short-term borrower be The value investor says there is no place for leverage in life. The most important thing is to spend less than your earings. “To finish first, you have to first finish, where you want to get to play the game for a long time,” he said hitpsleconomictimes indiatimes, com!markea/stocksinews/pabrai-10-commandmens-fr-becoming-a-successfulnvestoraricleshowi6712385t.ome 314