Mohnish Pabrai: Buy Stocks Now? Or Wait?

Well, as you guys know, one of the investors I follow very closely is Monish Pabrai. About a week ago now, he put out a new Q&A video on his channel with the Kolkata Value Hunters Club. So, I watched the whole thing, and I've pulled out some very interesting clips, which I think give us great insight as to how we should be investing at this moment in time and how Monish is thinking about the stocks he holds in his portfolio. So, let's have a listen to all the best bits right after this.

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So, the first question Monish was asked was essentially: should you be waiting for some sort of stock market correction before investing, or should we still be looking to invest in specific sectors or businesses right now?

Yeah, so I think those are good questions. Well, I mean, I think that can give you an opportunity; that's a possibility because it creates uncertainty. I'm always a bottom-up investor, so I always look at a specific business and I look at the kind of nuances around that business.

I've never taken an approach where I need to have exposure to a certain sector or anything like that, or even a certain country. So, in my opinion, I think the first question to ask when you look at a business is: is it within your circle of competence? Is it something you understand well?

Then the second is I think the secondary questions after that become easier because there are some businesses which may not get impacted much by credit. You know, just the nature of the business, they just may not.

I mean, let's say for example I look at a business like Jio, for example, right? What impact is going to have on Jio? You know, I don't think it makes much difference. If people need to communicate, they have a greater need to communicate when they can't see each other.

So, if anything, a business like Jio does better while COVID is happening. On the other hand, if there is some private hospital, the government puts all kinds of mandates on them, right? During COVID, and it may or may not even be able to make money.

So it becomes a lot murkier what would happen in the next year or two in other businesses. So I think the question would be: can you see clarity on it? Like, for example, I think last year when COVID hit, I think airlines were not investable. You could not invest in airlines because it was so opaque; you knew air travel would go down, then you don’t know how much the government will have.

Some businesses will get affected a lot, and other businesses actually will do better because of this. Like, you know, Zoom has done much better because of COVID. So I think that, you know, John Templeton used to say that trouble is opportunity.

So when you have these types of events going on, the baby will get thrown out with the bathwater. And so if you can identify certain businesses that you understand well and their prospects, near-term, long-term are pretty good, then those might be worthwhile.

I think especially if they fit into parameters like Nick Sleep, where they are high-quality businesses at the core, then it's a good way to go.

So, Monish is quick to say that no, you don’t want to be stuck in the mindset of waiting for something to happen. You don’t want to be caught in the mindset of, "Ah, the lockdown was so severe, and we're going to see the effects across the next year or two. I’m going to wait for something to happen and hope that I can pick up some bargains later."

In Monish's opinion, that's really not the way to handle it. He is much more focused on analyzing individual businesses within his circle of competence right now and then seeing whether this event that we’re just going through, the global lockdown, happens to present any opportunities to us right now, right here as we stand.

He draws on the example that not every business is affected the same by the events of today. For example, airlines got decimated, but social media and telecommunication companies thrived—that was his example with Jio, which is an Indian telecommunication company.

So it's not about waiting for something to happen; it's simply about analyzing what is happening right now, looking at individual businesses, and as Monish says, trouble is opportunity. So if you can identify businesses that you understand well and their prospects in the near term and the long term are pretty good, then they might be worthwhile.

So, the first takeaway: don't get caught waiting for something to happen—it's already happening. And while it is an uncertain time, the current events can actually work out very well for a lot of businesses, so there's always opportunities somewhere.

Okay, but next up, what do you do when you're already invested in some great companies that you really like, but they are currently coping it due to the current conditions? What then?

I think if you say to me that the company has great capital allocation, okay, yes. And the second thing you say to me is that their balance sheet can more than easily handle whatever hiccup year or two or three is producing, and you also say to me that at the core it's a great business—I hate the hotel business, okay?

You go on, you know this, make my trip or whatever, and you transparently see all the prices, and then you pick the lowest price. I mean, that's a useless business. Your dumbest competitor is setting the price.

But, yeah, so if you can figure out that the core business is a great business run by great capital allocators looking out for the shareholders, there could be some great bargains. But please be careful; some businesses you should only be a customer of, not an owner.

So this makes total sense, right? If you're in a business and the company is getting hammered currently, but the management team is crushing it and investing well, and the balance sheet is healthy—aka they have ample cash and not a lot of debt—and their business model is fantastic, then there's not too much to worry about.

You have to remember, in that case, you own a business, not a stock. So stop watching the stock; just watch the business. In fact, probably you might want to watch the stock, because as Monish says, there could be some great bargains to be had.

So really what Monish is saying here is just keep a cool head. Don't let your emotions get the better of you when you know that you hold a great business.

Okay, next question that came in was asking a very relevant question for right now. Essentially, there are heaps of great companies out there; we're seeing a lot of great growers, many of which unfortunately right now are very expensive. But the question was: how do you filter through these companies to actually find the best ones?

And the answer is that you only need one of those in your lifetime. You have 50 years as an investor, and you only need to be right once on a business like that.

So, I'll give you an example; I find this example even more compelling than Nick Sleep's example. So there's a company in South Africa which is now 106 years old. They were like a book, magazine, newspaper publishing company—the company called Naspers.

So in 2001, Naspers, 20 years ago, invested 30-32 million dollars into this Chinese company called Tencent. Okay, so they put 32 million into Tencent, and they got a 43% stake in that business.

And what is mind-blowing about Naspers and the chairman—I mean, the guy who's the CEO who's now the chairman—is through the 20 years that they owned it, they never sold the stock.

What ended up happening is the 32 million dollar investment—so Tencent has a market cap now of about seven or eight hundred billion U.S. dollars. And they sold a little bit, I think in the first four or five years, but basically they held about one-third of Tencent.

So the Tencent position that they own is like around 200 billion dollars. Okay, so this 32 million investment became 200 billion—became an 8,000-fold return for them. And they have done extremely well on their other investments and other things as well; this wasn't just one aberration, but everything else fails in comparison to Tencent.

Throughout this 20-year period, they got tremendous pressure from every corner you can think of to sell off the Tencent shares. So Tencent became a billion dollar position; they were told to sell it, then a 10 billion dollar position; they were told 100 billion dollar position.

And to their credit, the two guys who were at the top pretty much told everyone to get lost.

So the thing is that you know, you don’t need to be right that many times. What you do need is extreme patience. And when you find something that is incredible, you know, step up to the bat. Make it a meaningful bet.

There you go; you don’t need to be right that many times. What you need is patience to find the right opportunity, and then when you do find that opportunity, swing hard.

But actually reading through the lines on this example, I think the biggest lesson Monish is trying to convey here is that we should be thinking much longer term. We need to really extend our time horizons.

Yes, we need to be patient. Yes, we need to wait for that right opportunity. Yes, we need to grab it when it comes along. But importantly, don't be convinced to just let it go.

Extend your time horizon; just hold on to it. And this is something that Monish has been talking about much, much more recently. The most important thing to do right now is to look for the long-term compounders—the ones that you can actually see compounding for multiple decades into the future.

Because here's the thing: even if you get your valuation wrong and pay too much right now, if you buy a long-term compounder, in most instances, it just won’t matter. If you stuff up your valuation, you end up paying three times what the shares are worth now, but the company is growing at 20% annually.

Then in 10 years, the company will be six times as big. In 20 years, it’s going to be 38 times as big as it is today. So that's something that Monish has said he's really learned from studying Nick Sleep, especially today in these strange times where everything seems expensive.

Focus on the long-term compounders because a lot of the time, even if you overpay for a long-term compounder, holding it for an extra long period of time will have you still coming out on top.

You think about this; in 2010, Apple was six to twelve dollars per share, obviously adjusted for stock splits. But imagine your friend bought in at six dollars, and you decided to pass on it at twelve because you thought the price was too high.

It had gone up a hundred percent in a year; that's crazy—way, way, way too pricey. Well, today, your friend is probably retired somewhere while you’re still working your boring nine-to-five job somewhere around here.

If you have the patience and the temperament to hold long-term compounders for a very long period of time, in Monish's eyes, that's the secret weapon in this current investing climate.

This is definitely the main message that Monish is teaching right now. And he further supports that message with this example about Walmart.

Another insight Nick Sleep bought was that he looked at this company, Walmart. Walmart went public in 1970. Okay, so now Walmart has been public for 51 years, and the only people who have held the stock for the entire 51 years is the Walton family.

So Sam Walton died; Sam Walton's children have started dying, and the grandchildren are still holding the stock. So the Walton family pretty much has not sold it; it got split amongst many different Walton family people, but they have not sold the stock. They just get the dividend.

But they have held the stock for more than five decades after going public. They held it even more if you look at the time it was founded.

So Nick Sleep asked the question that if you owned Walmart stock as an institutional investor in 1980 or 1990, what caused you to sell the stock? Right? Why would you sell such a great compounder?

It's a good question: why would you sell it? If you're focused on the business and the business just keeps compounding and doesn't stop, why not just keep holding on and think long term?

If you did that with Walmart, you’d be very, very wealthy. If you did that with Apple, you’d be very, very wealthy. There are countless examples.

So, big, big, big takeaway there that Monish is talking about a lot at the moment.

But what about if you're just not sure? You think you're onto a winner—you've got a long-term compounder—but there are still a few things on your mind that stop you from pulling the trigger? What then?

What my take on all this is that there's no need to have envy or scratch your head or even try to say I need to figure out which one over here.

Things need to be, at the end, they need to be a no-brainer. So when you're making an investment, in the end, before you make the investment, it has to be a no-brainer.

So there you go; at the end of the day, it needs to be a no-brainer. And I think if people applied this thinking, they'd actually do much better at investing.

Because most people make, like, you know, 8 or 10 or 12 investments a year, and then they're nervous about them because they're not 100% comfortable with maybe the price or the valuation that they bought them at.

It's just better to just forget this approach. I like this test: before you pull the trigger, ask: is it a no-brainer? If it isn’t, don’t buy it.

I guarantee this will lead to fewer but better investments and also a lot less stress. So, this is one I really like.

Personally, from my point of view, I made two investments last March because back then when the stock market was crashing, I felt like they were no-brainers.

But then more than a year went past without me buying anything because I couldn’t get anything that even remotely felt like that. And now, just recently, I’ve made one investment in the past couple of weeks because again, I feel like this one is a no-brainer.

These opportunities don't come along very often; it's worth remembering that you might get one a year or less, so just stay patient.

As Buffett says, you wait for that ball that’s thrown right in the slot, okay? And when that pitch comes along, you whack it as hard as you can.

Not every pitch will be in that slot, but remember, we as investors, we can't be struck out. We can just let pitch after pitch pass through until 100 pitches later, that perfect one comes along, and we can just absolutely smack it.

So overall, guys, they are my main takeaways from this latest Monish Pabrai Q&A: long-term compounders, extend your time horizons, be ultra-patient. But when you know you can swing, swing hard.

But remember to go along for the ride, and if the business is compounding, then forget what CNBC is saying about the stock. Just focus on that business.

You're in a good business; you don’t want to sell it. Forget about the stock; focus on the business.

Anyway, guys, that will do me for today. Thank you very much for watching the video. I hope you enjoyed it; I hope you got something out of it.

Monish Pabrai is just such a good investor and a really good educator. That's why I love listening to all of his talks on his YouTube channel, so go and subscribe to his YouTube channel.

Maybe if you wanted to have a listen through the whole Q&A, I'll leave that link down in the description if you want to check it out. But overall, guys, that is it.

Leave a like on the video if you did enjoy it; subscribe to the channel if you are new around here. If you have not subscribed, definitely do so.

And if you're interested in how I go about my personal investing approach, passive or active investing, feel free to check out Profitable links in the description below.

But that'll do me today, guys. Thank you very much for watching, and I'll see you guys in the next video.

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