How Mohnish Pabrai DESTROYED The Market By 1,204% (MUST Watch Interview)

Summary

The speaker emphasizes the importance of understanding the underlying business before investing in stocks. He highlights the concept of 'circle of competence' and advises investors to only buy stocks they fully understand and are confident in. He also discusses the flawed practice of setting stop-losses for serious investors, as markets are auction-driven and can significantly fluctuate. The speaker suggests that investors should focus on businesses with strong growth potential and great management, rather than just looking for undervalued stocks. He concludes by sharing his experience of selling too early and the importance of recognizing when a stock is egregiously overpriced before considering selling.

Takeaways

• 🧐 Investing requires understanding the underlying business and its market capitalization, not just the stock price.
• 🏷 The concept of 'circle of competence' is crucial; investors should only invest in areas they understand deeply.
• 🤔 Before buying a stock, consider if you would be willing to buy the whole company at its current market value.
• 📉 Stop-loss orders are not recommended for serious investors, as market prices can fluctuate widely in auction-driven markets.
• 🏠 The speaker compares stock prices to real estate prices, illustrating how daily fluctuations are not indicative of true value.
• 📈 For long-term investments, focus on companies with strong growth potential and management, rather than just low prices.
• 🔮 When selling a stock, it's more complex than buying as it requires predicting the future value and performance of the company.
• 🚫 Selling a compounding stock should only be considered when it is 'egregiously' overpriced, not just fully or slightly overpriced.
• 💡 The speaker emphasizes the importance of patience and holding onto stocks that have strong fundamentals, even if they fluctuate in price.
• 🌐 In a market with many listed companies, not all will be efficiently priced, presenting opportunities for value investors.
• 📊 The speaker suggests that even in a bull market, there are likely to be misunderstood businesses that present good investment opportunities.

Q & A

What is the first consideration an investor should have before buying a stock?

The first consideration an investor should have is understanding the underlying business they are investing in and having a point of view on where the business stands versus the market capitalization.

Why is knowing the market capitalization important before buying a stock?

Knowing the market capitalization is important because it tells you what the entire company is worth, similar to knowing the price per kilogram when buying rice in the market.

What is the concept of 'circle of competence' in investing?

The 'circle of competence' is a crucial concept in investing, which refers to the area of knowledge or understanding within which an investor can make informed decisions. It helps in focusing on businesses one understands and avoiding those outside this area.

According to the transcript, what percentage of stocks would Warren Buffett consider outside his circle of competence?

Warren Buffett would consider approximately 95% of stocks outside his circle of competence.

What should an investor do if they understand a company like Apple and it's within their circle of competence?

If an investor understands a company like Apple and it's within their circle of competence, they should then ask themselves if they would be willing to buy the whole company for its current market capitalization. If yes, they should buy the stock; if not, they should avoid it.

Why does the speaker suggest that most investors should consider indexing as a good idea?

The speaker suggests indexing because it allows investors to buy a broad market index with low frictional costs, and it averages out over time, reducing the need for constant monitoring and decision-making.

What is the speaker's view on the use of stop-loss orders for serious investors?

The speaker believes that the notion of stop-loss orders should be done away with for serious investors, as it does not make sense to sell a fundamentally sound investment just because the price has temporarily dropped.

Why does the speaker compare the idea of setting a stop-loss on a stock to selling a flat at a loss?

The speaker compares setting a stop-loss on a stock to selling a flat at a loss to illustrate that if you bought an asset because you believed it was fairly priced and intended to hold it as a long-term asset, selling it at a loss due to a temporary drop in price contradicts the original investment thesis.

What is the speaker's opinion on the importance of buying stocks within one's circle of competence?

The speaker emphasizes that buying stocks within one's circle of competence is of utmost importance, as it allows investors to make informed decisions and avoid investing in businesses they do not understand.

What does the speaker suggest as the best approach to finding investment opportunities in a market that may be fairly valued or overvalued?

The speaker suggests that even in a market that is fairly valued or overvalued, there will always be misunderstood businesses or opportunities that are undervalued. Investors should look for such opportunities, focusing on businesses with secular tailwinds, great management, and long growth engines.

How does the speaker define an 'egregiously priced' stock and when should one consider selling it?

The speaker defines an 'egregiously priced' stock as one that has reached a valuation that is significantly over its perceived fair value. Investors should consider selling such stocks when they are not just fully priced or overpriced, but egregiously priced, giving great companies with strong growth some leeway in their valuation.