Collection: Mohnish Pabrai - #138 'Buffett's Too Hard Pile and Munger's First Rule of Fishing'


Video Link: https://youtu.be/eEd936ZB0ho


In this episode, Mohnish Pabrai was asked how does he take the principles of value investing to evaluate conglomerate businesses?


In this episode, you’ll learn:

  • Warren Buffett's Too Hard Pile.

  • The importance of understanding your circle of competence.

  • Munger's first rule of fishing.

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

 

[Transcript]

(Source: https://youtu.be/bLjoL5zhBxA)

AUDIENCE MEMBER 00:00

You know, before undertaking any type of investment, you have to like really really know the business inside out like the core about how it operates, how does it generate and maintain profitability so on and so forth.


And so I was wondering from your point of view, how does that approach really take place when we look at a diversified business or like a conglomerate? Like take for example, GE as a large company that really diversifies into many many verticals, how would you really take the principles of value investing and put in onto a large company with that kind of diversification.


MOHNISH PABRAI 00:42

You know, Buffett has a box on his desk which says “Too Hard” on it. And so he says that probably 98% of stuff he encounters goes into the “Too Hard” pile, which means something he cannot figure out and he’s a very smart guy. And so, the thing is we don’t need to know everything about everything.


So for example, you know, gentleman here mentioned venture capital and early stage investment and all of that. You can go a lot of moon shots with that approach, you can also get a lot of zeroes, right. Not an easy game. So for me, I would just take that whole thing and put it into Too Hard pile, for me. For him, it’s not the case because he’s got some competence inside, so this varies by individual.


So if I look at GE, here’s the reasons why I would just not even spend 2 seconds on it. So number one, it’s probably followed by 2 dozen analysts who spend a lot of time on GE and I can look at any of their reports and I can see that there’s no factor of 5 or 10 between the current share price and what the share price is.


In fact, I would say that’s probably the case of the thousand largest businesses in the US, forget about that. So if the companies in the Fortune 500 or the S&P 500 whatever else, we’re done. The beautiful part is we just finished 500 businesses in two seconds, it’s awesome.


You like my speed? (Laughter) I have great speed, you know, I’m faster than Buffett get flip pages.


So we don’t need to understand everything about everything, we can just focus on, you know, Munger says: ”Go fishing where the fish are.” Are there fish in the Fortune 500? Maybe if I spent 10 years, I might find a couple of fish there that I might have missed. But you know, let’s keep it simple and just say no and move on.


So basically, focus on where the fish are, focus on sectors that people hate, unloved countries that are unloved. You know, things that would cause distress for example, Qatar been in the news lately, have you looked at stocks in Qatar?


You know maybe if you’re doing nothing tonight, you know, their stock market is tanking, and I haven’t looked at the Qatar stock market I don’t know what kind of companies in there. But let me put it this way, there is higher probability of finding value there than in GE.


And so that’s the name of the game is basically go to where the fish are, where you think the fish are and then the patience and the discipline to – you know, look for, you know, kiss a lot of frogs before you get to a prince.

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