In an interview for the Fall 2019 issue of the Graham & Doddsville Journal, Mohnish Pabrai offered his insight into how he seizes investment opportunities based on one of the fundamental principles of value investing: securing an adequate margin of safety. Pabrai, like Seth Klarman and Warren Buffett , is a true value investing disciple of Graham & Dodd and he discussed how he applies judiciously, a few fundamental tenets of the value investing methodology that allows him to intelligently assess potential investment opportunities.
Like Charlie Munger, Pabrai believes in a “keep it simple” approach to investing. By focusing on a few fundamentals, an investor has a better chance of making informed investment decisions, not impacted or skewed by the daily vicissitudes of the stock market and the prevailing conventional wisdom. As Munger notes,
“You don’t need higher math in business and if you learn it you feel tempted to use it – to your detriment. You really have to understand the company and its competitive positions; that’s not disclosed by the math. There is something to be said for ‘keeping it simple.’”
Pabrai understands, that while investing itself is simple, it’s not easy. However uncomplicated the basics of investing may be, few have the temperament required for adhering scrupulously to the few bedrock principles upon which successful long-term investing is based. At the outset, Pabrai articulates this proposition, by stating that, because he is incapable of a disciplined approach to investing, Mr. Market, is the perfect embodiment of an investor who defines uncertainty solely in terms of the daily prevarication of the stock market.
Fickle and risk-averse investors like Mr. Market eschew any attempts at ascertaining the intrinsic value of a company with the intention of holding its stock for the long-term, but rather follows the crowd, which abhors uncertainty, because they have no understanding of the concept of margin of safety