Stock Research Impacts Financial Health – Mohnish Pabrai

In this talk, Mohnish Pabrai discusses how the plethora of deeply entrenched biases and flawed evolutionary brain wiring makes us prone to make plenty of mistakes when picking stocks. Specifically, the more time we spend analyzing a given business, the more likely we are to like it and invest in it.

Notes

  • Example where Capital Group created a best idea fund where they would take the best fund idea from each fund manager and group that together and create a fund
  • The fund underperforms year after year, after multiple iterations. Summary of the reason is that human is biased to selections that they’ve spent the most time researching
  • Quote from Warren Buffett “what human are best at doing is interpreting new information so that their prior conclusions remain intact”
  • Free lunch: greater the margin of safety, the higher your returns
  • It’s always better to buy growth. If you buy a cheap asset, upside is limited
  • Negative capital with high growth is the holy grail of investing (FAAMG)
  • Learnings to focus on not just cheap stocks, but cheap AND great stocks
  • How to write a great investment thesis example of Rain industries, written by Rajiv Pasricha: https://www.dropbox.com/s/gj6rhpbhih181s6/Rain%20final.pdf
  • Ignore the market because it has no insight, focus on the minutiae, specific business, specific stock price
  • Market is not an efficient market because it’s an auction system which vacillates between fear and greed
  • Don’t sell the compounders when they get fully priced or overpriced. Only sell the compounders when it’s egregiously priced. Your biggest wins in life will be these compounders.
  • Bet sizing gets down to conviction, your money or client money, or where you are in life

How to Counter Bias

  • Issue: We cannot study companies without studying the companies, but if you spend time studying companies, you get biased
  • Being aware of the bias: Be fluent on the other side of the argument
  • Just say no quickly: spend time on no brainers, and don’t spend too much time researching a company too in depth. Look for quick patterns for high probability wins