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Collection: Mohnish Pabrai - #100 'Value Investors vs. Strategic Investors'


Video Link: https://youtu.be/1t97rHvx7sU


In this episode, Mohnish Pabrai was asked what is the difference between a value investor and a strategic investor?


In this episode, you’ll learn:

  • The difference between value investors and strategic investors.

  • Why domain knowledge can be a huge advantage in investing?

  • Why did Mohnish Pabrai sell his stocks much sooner than expected?

To check out all Collection: Mohnish Pabrai <click here>

 

[Transcript]

(Source: https://youtu.be/Jo1XgDJCkh4)

AUDIENCE MEMBER 00:00

I have another question on your opinion, on the differences between a value investor and a strategic investor.


And we noticed that many Chinese companies took equity of overseas companies to help them go into China, like the China Fosun took equity of Club Med, Club Med the very big tourist and hotel group and help Chinese customers have access to those hotels.


And China Wanda acquire many good film companies in Hollywood. And of course, they would make a lot of money in China, in China's film industry. And we – It often, or typically, we assume that a value investor is an outsider of the business. They don't want to do anything to help the business, so what's your opinion on being a value investor or being a strategic investor?


Do you think you will get information on the action of the strategic investor and go behind with them – like follow them – follow their equity taking?


MOHNISH PABRAI 01:23

Well, I think that’s a really good question and a question I've never thought about before, so it's a good question to ask because at least I can think about it and I'll mumble some answer right now. But maybe I'll think about it some more and next year I might have a better answer.


Yeah so, you know, Buffett says that I'm a better investor because I'm a businessman, and I'm a better businessman because I'm an investor. So there's clearly an interplay and advantage on those.


One of the things that happens with entrepreneurs or CEOs who are running specific businesses is they have two things going on. One is usually their circle of competence is limited to that business. So if they are in the hotel business, they understand the hotel business. If they're in the shipping business, they understand the shipping business.


And that competence can be an advantage because if they understand the movie business in China, they probably have a better shot at understanding the movie business in the U.S. than a person who is not in the business at all. So the domain knowledge is a huge advantage.


The disadvantage normally that strategic investors have is they may not understand, or they may not have a good understanding, of value investing. So like for example, a lot of companies buy back their own stock.


Now, if you're in the hotel business it means you understand the hotel business which should mean that you should understand when it is undervalued and when it is overvalued. Most company CEOs are not really good at understanding when their businesses are under and over-valued.


And one of the reasons they don't understand that is because if you are going to be a great leader, you have to be an optimist and you have to be a builder. And so you always see the grass is green on the other side. Value investors are always skeptical. They are always looking for what is wrong.


One of the reasons I sold all these companies much sooner than I should have is because I'm always skeptical of what might go wrong, for example. And – so they are different skill sets.


So if you have some data which tells you that the CEO of the film company in China is a good capital allocator, then that can be a huge tailwind, if you have some data that tells you that. So for example, obviously Warren Buffett is really good at buying companies, John Malone is really good at buying companies, Sam Zell is really good a buying companies.


So – but lots of the – You know, Japanese came into the U.S. markets in the 1980s and they bought all kinds of real estate, you know, trophy real estate all over the country, and they grossly overpaid for it because they looked at their experience in Japan where these properties are much more valuable because they were in a bubble. So they misunderstood what proper valuations were and they didn't do well. Even though they understand real estate in their own country.


So I think that it's a good idea to follow the strategic investors into other markets if you can figure out whether or not they are value guys, if they understand value.


You know, like for example, the deal for Starwood. So I forget the name of the Chinese company (China's Anbang Insurance Group), it was an insurance company that was chasing Starwood.


And Starwood is a very prime asset. It's a great asset, but I don't know enough to know whether that would or would not have been a good deal for them. They were clearly paying up significantly more than what the market had priced that company. So you'd have to have an understanding of how those people think and whether they think correctly.

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