While searching Amazon for classic investing books, two must-read books were discovered, both out-of-print, were selling for considerable sums. Seth Klarman’s Margin of Safety was going for $1,700 and Mohnish Pabrai’s Mosaic sold for $340. You might think the price on Klarman’s book the more remarkable. On calculation, by buying and selling, Margin of Safety, first published in 1991, would have turned in 29% a year. On the other hand, Mosaic, in just three years since its publication, has put in 144% a year.
The price on Mohnish’s book is only one of a number of indications that a cult is developing around him. He’s all over the internet.
No doubt one of the reasons is his new book, “The Dhandho Invesor.” A value blog likes it as to say, “If you want a book to help you understand value investing, this book can help you accomplish your goal.”
Before becoming a value investor like Mr. Pabrai, you’ve got to admire a pundit who, unperturbed by the incredulity of his Bloomberg hosts, won’t be drawn into breathless comment on the recent 100-200 point moves in the stock market.
Investors, says Mr. Pabrai, should think like a businessman, not a Bloomberg presenter.
“I talk in the book about this concept of low risk, high uncertainty. So there’s a perception that entrepreneurs are risk takers. Well, in reality entrepreneurs avoid risk. They try to minimize risk…They do absolutely everything to minimize the downside. But they are also humans that are very comfortable with uncertainty. So they can believe a wide range of outcomes and be very comfortable.”
Minimizing the downside means buying stocks that are hated and unloved, often ignored by Wall Street, that have already reached a “floor.” Sounds familiar? It should. Mr. Pabrai describes himself as a follower of Mr. Warren Buffett, often referred as the world’s greatest investor:
“I’m just a humble disciple, or like you say I’m a shameless cloner.”
One of Mr. Buffett’s many insights run against conventional investment thinking, and by the sound of it, it’s the origin of Mr. Pabrai’s contrarianism. Conventionally, risk means volatility (measured by a share’s beta), so a falling price makes a share more risky. But, as Mr. Buffett explained, in a speech at Colombia Business School in 1984, subsequently became one of the best investment speeches that gives a profile into the genes of a superinvestor, in a value portfolio the bigger the expectation of reward, the lower the risk.
For example, in 1973, the Washington Post Company had a market capitalization of $80m although its assets were worth at least $400m, Mr Buffett said:
“Now, if the stock had declined even further to a price that made the valuation $40m instead of $80m, its beta would have been greater. And to people who think beta measures risk, the cheaper the price would have made it look riskier. This is truly Alice in Wonderland, I have never been able to figure out why it’s riskier to buy $400m worth of properties for $40m than $80m.”
Mr. Buffett was paying homage to a concept developed by Benjamin Graham, the father of the cult of value investing. That concept was the “Margin of Safety,” purloined by Seth Klarman for the title of his book. Mr. Buffett explains it this way:
“You don’t try and buy businesses worth $83m for $80m. You leave yourself an enormous margin. When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000 pound trucks across it. And the same principle works in investing.”
In other words, the lower the price relative to the company’s valuation, the higher the margin of safety. A low price reduces risk. If you watched the interview with Mr. Pabrai, you’ll have noticed he really has shamelessly cloned that model, passed down, as it were, from Mr. Graham, to Buffett, to him.
So why listen to Mr. Pabrai, when you have the works of Benjamin Graham and Warren Buffett? Well, Mr. Graham died in 1976, so the focus must, to an extent, switch to his disciples.