Pabrai saved $1 million by starting his own business in 1994, and now has a net worth of more than $150 million after investing in the market. Mr. Pabrai, an Indian-born investor, has made no secret of being a rabid copycat of investment gurus like Warren Buffett and Charles Munger.
Pabrai once said, "Human DNA contains strange substances that make it impossible for people to adopt good ideas." One thing I learned a long time ago is to keep looking inside and outside the industry, and when you see someone doing something smart, force yourself to do the same."
Pabrai sums up his rule of thumb as "dumb" investing: When things are good, I earn more; when things are bad, I lose less. This is also the investment guru such as Buffett, Munger and others pursue the low-risk high-return investment rule. Such fantasy investment opportunities typically arise only in times of extreme market downturns or when a public company suffers a one-off, solvable crisis. On the day of the gold rain, investment masters will bet their own wealth to re-invest, Pable's practice is also "less bets, big bets, only pick the best investment."
In his book The Foolish Investor, Pabrai Outlines 10 principles of investing:
1. Invest in existing businesses
By buying shares, you take ownership of your existing company, which gives you a big advantage - the company already has its own team of employees and business model. You can enjoy the benefits without any extra effort.
The existence of the stock market makes it normal for investors to own shares of multiple companies, and the types of stocks and the time they hold them are all under the control of investors. The realization characteristics of stocks make it easy for investors to buy and sell stocks at any time. The stock market is definitely a great progress in the development of human civilization. This wealth machine is superior to other assets and is easy to use and cheap to operate.
2. Invest in enterprises with simple business models
Before buying a business, we must understand its intrinsic value, which is determined by its net cash flow discounted at a certain interest rate. Investing in stocks is not easy, and in order to win this psychological war, the most effective weapon is to buy a business with a simple business model, and I will convince myself why the probability of making money is higher and the probability of losing a lot of money is low.
I'll even write down the entire argument, and if I can't complete a single paragraph of the argument, then there's a problem with the investment. If I had to open an Excel spreadsheet and run a series of numbers through it, this would definitely be a red flag for my investment ideas. Which just goes to show that maybe I shouldn't have invested at all.
Third, invest in distressed enterprises in depressed industries
In the case of the stock market, retail investors who do not look good about the outlook can sell all their shares in a matter of minutes. Human psychology has a greater influence on stock market trading behavior than buying entire companies. The only thing that will allow stocks to trade successfully is for investors to have the courage to buy when the market is selling at very low prices.
We can only eliminate those companies whose business model is complex or whose business model and scope we simply cannot understand, and then we will have a partial list of companies whose business model is simple and familiar.
Invest in enterprises with lasting competitive advantages
The corporate world has many sustainably competitive companies, such as Coca-Cola, Harley-Davidson, Nabisco's Oreo cookies, and so on. Of course, there are many companies that do not have (sustainable) investment advantages, such as Delta Air Lines, General Motors, Cooper tires, Gateway Computer, etc.
Even those companies with sustainable competitive advantages cannot live forever, so when using the discounted cash flow formula, to lower the expectations of a company's young adulthood, we should not set the period at more than 10 years when discounted cash flow calculation.
Five, less bets, big bets, only pick the best bets
The key to foolish investment is to make fewer bets, to make big bets, and to bet on the right time. Those who bet long, small and often have poor returns. Focusing on investment costs and investment opportunities with low risk and high returns is the key to creating wealth.
6. Focus on arbitrage (moat)
A foolish carry spread is what Warren Buffett calls a moat (competitive advantage). Foolish carry spreads will eventually disappear, the key question here is how long the carry spread lasts and the sustainability of competitive advantage. As Buffett has said, the key to investing is not to assess how an industry affects society, or how fast it is growing, but to determine what a company's competitive advantage is and, most importantly, how sustainable that competitive advantage is.
All competitive advantages will eventually disappear, even seemingly long-term foolish arbitrage spreads will disappear, but this does not mean that we will not invest, or investment can not get a better return, we need to understand the competitive advantage lasts for 10 months or 10 years. The larger the arbitrage spread, the better, and the longer it lasts, the better.
The importance of safety margin
The vast majority of top business schools around the world do not understand the concept of margin of safety or reckless investing. For them, low-risk investment projects are bound to have low returns, and high returns are bound to require high risks. Sooner or later, we're bound to come across low-risk, high-return investments that are all around us.
The most vivid example of the margin of safety in the stock market is Warren Buffett's observation when he bought shares of the Washington Post in 1973: Our advantage is to learn from Graham that the key to successful investing is to invest in stocks whose market price is much smaller than the intrinsic value of the business. Buffett's original $10.6 million investment in the Washington Post ended up making a hundredfold return on his investment. Margin of safety is a very effective means to reduce the risk of failure as much as possible, while increasing the probability of profit.
8. Invest in businesses with low risk and high uncertainty
The classic dumb investment is when things go well, I make more, when things go badly, I lose less. Fear and greed are fundamental human psychology. As long as people make investment decisions in the market based on their emotions, pricing will be influenced by fear and greed.
Irrational behavior occurs when extreme fear takes over the market, so the stock market is like a theater where people see smoke and shout, "Fire!" It's on fire!" People will be desperate to run for the emergency exits. In the theater of the stock market, where you can't leave until someone else has bought your seat, at what price do you think you can sell it?
The real investment secret is to only buy seats in theaters that aren't on fire, where the audience has a false alarm, or where the fire is about to be extinguished. Everyone's in a hurry. You need to get in.
Imitation is better than innovation in investment
Some of the world's great entrepreneurs, such as Bill Gates, have taken advantage of what other companies have created, and emulating others is one of the reasons for their success. Sam Walton spent his life learning and imitating the business model of other retailers. Walmart's sales model is modeled after Kmart. If you look at successful business models, you will find that many successful ideas were copied from other companies by good managers and executed in new ways.
In order to invest in the stock market, we should ignore the practices of innovators and pay attention to the companies run by those who imitate or make use of their ability. This is the real foolish investment trading way, that is, the investment way with low risk and high return.
The Art of selling
Many investors buy a stock at $10 and then sit back when it hits $8, eager to dump it and look for the next potential stock. The human brain has evolved over millions of years, but we still can't take stock market volatility very calmly. When the lion roars, our brain tells us to run. We will not continue to approach the lion, we know that "36, walking is the best policy." When the stock market crashes, we feel fear, as if we heard the roar of a lion. Our first instinct is to sell the stock, erase the memory of having owned it, and get out of the market.
This is why the vast majority of investors do not earn higher returns than the stock market index. They are very keen to buy stocks that are rising, and when they hit stocks that are falling, they are always tempted to "cut their losses now" and get out. In two or three years' time, we're not going to run and hide because the lion roars. This, to some extent, prevents us from irrational and unprincipled selling in times of extreme pessimism.