Mohnish Pabrai on Why Investors Should Operate Alone? | [C:M.P Ep.20]

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In this episode, Mohnish Pabrai shared why investment manager should operate alone and why are the investment gurus managing billions dollar funds alone?

In this episode, you’ll learn:
- Why investment manager should operate alone?
- Why investment gurus like Warren Buffett and Charlie Munger operate alone?
(https://www.yapss.com/post/collection-mohnish-pabrai-20-why-investment-gurus-operate-alone)

#MohnishPabrai #BostonCollege

[Transcript]
MOHNISH PABRAI 00:08
So are you all seeing Buffett's letter on the screen? Okay, alright.

So you know, this is not a doctor document. This is a real letter that Warren Buffett wrote to me and responds to me apply for a job with him in 1999. And this was before Pabrai Fund started and at the time the only thing I had an interest in doing was to learn the – Learn the art and science of value investing from him.

And so I suggested to him that he could hire me at zero cost and such. And very quickly within about 5 days of me mailing letter. I had this response back from him which I was pretty disappointed about the time.

And anyways, in a few weeks after that I picked myself up with some help from my friends and decided to start Pabrai Fund and you know, we started with a million dollar made 8 investors. And I tried to set it up as closely as I could to the Buffett Partnerships.

So let's go to the next slide.

And so the question that comes up, you know when you read that letter is that you know, why does Warren Buffett whose got, you know – I don't know, 50-60 billion of new worth want to operate alone and with no analysts or associates?

And then why does Charlie Munger want to do the same? And then there's a good friend of mine who's a value investor – Guy Spier – operates the same way. In fact, he used to have an analyst till he figured out that didn't make much sense and you would actually, you know, kinda causing him to have a results there was somewhat negative and what he wanted and so he went from no analyst to analyst back to no analyst. And I think he's quite happy now.

And of course, you know, I operate alone and the question comes up, you know as to why I would want to do that.

And let's go to the next slide Arvind.

And so, you know the investment business is that there are more than 50,000 publicly traded stocks around the world. And even if you have a 10-person investment team, you know, very smart folks who are in the team. They cannot actually look at more than a few hundred companies as a group together in a year. In fact, they will probably get to less than that number.

And so if you are an investment manager with this 10 person team that you're working with was doing a lot of research for you. You would be sitting in reduced to first a lot of your time, will be going to manage the team but also would be reduced to just getting a cliff notes version of the research these folks were doing and then on top of that you would have secondary data. So you would not really have a full data set the way the primary people doing researching had it.

So and let's go to the next slide Arvind.

And so basically there's no way for investment manager to be on top of thousands of businesses that's just not possible with or without a team. And so really what the investment manager has to do regardless or team size is they have to take shortcuts because, you know, the data set is just too large. And the way they take shortcut, there are many ways to take shortcut.

So, you know, for example there's a mutual fund which is based in Minneapolis called 'Mairs & Power Fund' some of you may have heard of it. And I think the Mairs & Power Fund is almost exclusively invest in companies based in Minneapolis. And so you know, they shrunken that universal public companies to look at by having a mandate only invest in Minnesota companies. There are other companies that only invest in companies that are socially responsible.

And certainly value investors take all kinds of shortcut, they might take shortcuts related to P/Es or book values or you know, cash flow multiple and those sort of things to try to narrow the universe down. And you know, there are – you know, Buffett says that it is not the size of the circle of competence that you have that determines how well you do as an investment manager.

It is knowing the boundaries of that circle really well that are really important. And you know, you don't need to know a whole lot about too many things to do quite well as an investor.

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