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Collection: Mohnish Pabrai - #60 'When To Buy & Sell?'



My first question is a lot of people teach us how to buy, I would like to know your philosophy on how to sell or when do you sell.




Because childhood we been taught to buy things in the shop, we never been told to go and sell something. So it's very difficult.

And second question is that very few people are lucky to have the float of an insurance company, like you and Mr.Buffett have. And in India, lot of capital misallocation keep happening at the promoter's end, which does not permit you do all the stock forever kind, you know, like buy and hold strategy that Mr.Buffett always tell us to do.

So there are always this challenge in our minds whether we have to always look into that sense, will you still say in the India context, buy and hold is the right strategy?


Sure, that's a great question.

Well, I would say that selling is more difficult than buying. You know, it's usually easy to get into things and hard to get out. Just a few things that I do is that – And these are just I think most quickly, naturally or obvious to all of you or most of you is that you know, if you are operating within your circle of competence then you understand the business and if you understand the business, you understand what is worth.

And you would have a good idea so the market is trading at 50 rupee and has a market cap of, you know, 200 crores. And you understand the business and you think it's worth 500 crores. Then you know, it's a [Inaudible] metric, you'd very clearly in your head.

And I usually write up one paragraph of what my perspectives is on the stock and what I think the intrinsic value is, and why I think is worth that, and usually in very simple english terms. And I do that before I buy.

And usually I'm looking to sell at about 90% of what I think is perceived intrinsic value. And usually I go back every 3 months or 6 months and update my thoughts and perspective because the company may have some development.

But at least when it get a year or multiple years intrinsic value may have changed and hopefully, it has increased. And then you know, you can accordingly update intrinsic value and accordingly update what do you think the selling price should be. And so it's, you know, it's [Inaudible] basic of Graham which is you are not buying a stock, you are buying a business.

So some basic thing just to keep in mind that you probably approach it from the perspective as if you are buying the entire business. You know, so if Apple has a market cap of 700 billion, you know the question to ask yourself is that if your family had 1.5 trillion in value for example, would you be willing to buy the entire company Apple at 700 billion?

And if the answer is yes then invest in the stock, and if the answer is no then you shouldn't even buy a 100 dollars value of stock. So the mindset of looking at the asset goes into stock is important.

If you understand what the intrinsic value is then you are also there. And of course there are mistakes in investing and you know, mistakes actually are quite numerous even among great investors. And so whenever it is obvious to you that you had made a mistake then you can revalue it.

One of the thing I used as a circuit breaker for myself, just to make sure that I'm not kind of trigger happy is – Usually, we will tend to get self-doubt about a stock especially when it decline in price after we buy. And my own history is most thing I buy, they know I bought the stock and they proceed to decline. (Laughter)

Immediately, after I bought it. Has that ever happened to you? Okay, just you and me, nobody else. (Laughter)

And so what I do is that to counter any urges to take instruction from Mr.Market on value is – I just use a rule there, I'm willing to sell a stock at a loss until at least few years had passed the time I bought it. And present intrinsic value has to be below present stock price. So it has to be very clear at the present which is below present stock price and significant lot of time has passed so that you kind of shaken out [Inaudible] market driven psychology that may be driving you.

And the second part is that which is buy and hold versus you know, trade in and out is – You know, I think a market like India is a market where there is the possibility of having very long run ways.

You know, there is a possibility of finding, you know, relatively small businesses that have long run way, high return of capital, good management and have tailwinds. And the very best investments would be non-investment that are cheap from a [Inaudible] perspective, but once that have those specific value, where there's run way with business could be worth 10 or 20 or 50 times in revenue in 5 or 10 years and such.

So I think at that – If I were in India, that would be my primary focus is to try to find – And I think the market here are very different from U.S. market to the sense that it's – To some extent, it become like PE [private equity investment].

You have to do a lot of work in terms of understanding the nature of management and ownership, and so on. But to the extent that you can identify those long run way opportunity, and you can identify them at prices that are quite reasonable then I think that's the way to go.

The buying and selling is also perfectly fine, but I would say do it within the context of, you know, that you own the business. And you think of it as owning the business versus owning the stock.

And look at it as if you're buying and selling the entire business and whether the price that you are buying and the price that you are selling is rational, a rational decision both ways and so on. So that's my two cents on it.


[YAPSS Takeaway]

When you buy a stock, look into it as if you are buying the entire business.

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