Collection: Mohnish Pabrai - #150 '3rd Commandment of Investment Management'



[Transcript]

MOHNISH PABRAI 00:00

The third commandment, thou shall accept that thou shall be wrong at least 1/3 of the time.


And, you know, some of these commandments leaked out from God over the years and this comes from John Templeton and basically the investment process is one where we are extrapolating or we are trying to extrapolate the future of business or the future of many businesses, and by definition that is a very inexact science.


There are a multitude of factors that are going to affect every business into the future and especially when we are trying to forecast or figure out what happens to a business five years from now or ten years from now. It is an exercise fraught with difficulties and definitely fraught with a high error rate.


And so basically if I were to pick or – let's say, my current portfolio, if 10 stocks made up most of the portfolio. There are probably at least four of them that will not behave in the future in the way I expected them to behave when I made the investment.


So it doesn't mean that 40% of the time I will lose money, what will happen is that at least 40% of the time I will either not make as much money as I thought or I might lose money on some investments or they might flatline or they might even do better – far better than I thought – all of the above.


And so the – this is an exercise in humility in terms of managing investments and one has to always accept the fact that the future trajectory of businesses is and predicting that the trajectory is at best an inexact science.


And so we have to be kind of humble enough to accept that, you know, even our highest conviction ideas may or may not get to where we expect to get them to.


(Source: https://youtu.be/9tGjXPhnp-s)

 

[YAPSS Takeaway]

3rd Commandment of Investment Management: "thou shall accept that thou shall be wrong at least 1/3 of the time."


Be humble to accept that you could be wrong even if it is your highest conviction ideas, so keep learning and challenge your thoughts.


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