The shameless copycat investor
Published on: 27 October 2024
Early 1990s.
Some Japanese engineers were stuck.
Their problem – noise.
They had bullet trains. The tracks crossed many residential areas.
When the fast bullet train entered a tunnel, it compressed air in front of it.
This was fine – the train was powerful enough to deal with.
The problem was that when the train reached the other side of the tunnel, the compressed air was suddenly pushed out into the open.
This created a loud sound – a sonic boom.
Residents of the areas did not like it.
The engineers wanted to make an even faster train. But that would mean an even louder sound from the tunnel opening.
It was a challenge they had been working on for some time.
One engineer, Nakatsu, had thought about this challenge for a long time.
Nakatsu also had a hobby – birdwatching.
During his discussions with other engineers, he realised the sonic boom had something to do with the change of pressure inside and outside the tunnel.
The pressure inside and outside the tunnel were very different.
He was reminded of a bird.
The kingfisher.
The kingfisher dives at an incredible speed and enters the water head-on to catch fish.
Nakatsu noticed that when the bird enters water, it does so head first. The bird’s beak tears through the water.
And despite the speed of the kingfisher, very little water splashed.
Nakatsu decided to experiment with the beak’s shape.
He copied the shape and put a similar share on the train’s front.
It worked.
The newer generation of bullet trains had a long hood that looked similar to the beak of a kingfisher.
The noise created by the train was significantly lower.
They were able to build an even faster bullet train – one that could reach 320 kmph.
What’s interesting to note here is, they did not invent a new shape.
They just copied a shape that worked – and had worked for thousands of years.
Shameless Copycat
Mohnish Pabrai lives in America.
He is famous for admitting, “I’m a shameless copycat”.
In fact, he goes on to say that he has no original ideas; that everything in his life is cloned.
Mohnish has built an investment career out of mimicking Warren Buffett and Charlie Munger.
Some media articles also call him the Indian Warren Buffett.
On one hand, we often hear, “do not copy others’ investments”. On the other hand, we hear someone like Mohnish claim that he has copied Warren Buffett.
What is happening?
The answer lies in how Mohnish copies Warren Buffet.
Many people assume that Mohnish simply invests in the same stocks as Warren.
This is not true.
What he does is, he copies the principles and philosophies of Warren Buffett. He applies those learnings to his own research – and buys stocks based on that.
Mohnish is such a fan of Warren Buffet, he paid $650,000 to win the chance to have lunch with Warren Buffett in 2009.
He speaks highly about the lessons learnt from this lunch.
Early Life
Mohnish Pabrai was born in Mumbai in 1964.
In the 1980s, he moved to the US and became a computer engineer. He got a job at Tellabs.
During his free time, he was building a side-business called TransTech.
When he started getting enough clients, he quit his job and started running TransTech full time.
In 1994, he was at an airport when he read about Warren Buffett in a magazine.
Till that point, Warren Buffet had managed to grow his wealth at 31% per annum for 44 years!
That means an investment of Rs 1,000 would become Rs 14.4 cr in 44 years.
Absolutely intrigued, Mohnish started reading about Warren Buffett and Charlie Munger.
In 1999, he sold his company. And he started his hedge fund business.
And thus started his career as a fund manager.
Philosophies
His investment philosophy – nothing new.
It is pretty much what Warren Buffett and Charlie Munger say.
Invest in businesses with a good track record
Choose stable/low volatility companies
Look for companies with strong moats
Buy shares when they are undervalued
Have a long-term approach to investing
He does not believe in buying many stocks. The idea is that he wants to concentrate (and not diversify) his investments.
Since he likes buying undervalued stocks, he keeps his eyes open for troubled industries. That is when many companies’ stocks become undervalued.
And obviously, he sticks businesses he understands – those that are within his circle of competence.
He calls this ‘dhando’ approach.
Dhando means exactly what you are thinking – business.
Mohnish has even written a book called ‘The Dhando Investor’.
Investments
So he copies Warren’s strategies and philosophies.
How has it done?
From when he started in 1999 to 2007 (right before the 2008 recession), he made 37.2% per annum. When the recession hit, his returns fell to - 47.1% per annum.
Concentrated portfolio can grow fast – but can fall fast too.
But this did not seem to bother someone like him – a long-term investor.
By 2018, his hedge fund had managed to grow over 1200% compared to S&P 500 (that grew around 160%).
That means, roughly 14% per annum. The index in the US, S&P 500 returned less than 5% over the same period.
His concentrated investing style has shown a tendency to fall sharply in bad times – his investments fell by 60% in 2008.
In some others years too, his concentrated portfolio has dipped downward. But the same concentrated nature also gave him his high returns.
He continues to stick to his copied philosophies – the ones he picked from Warren Buffett and Charlie Munger.
Some sources claim his net worth is around $2 billion as of 2024.
He is seen driving around in a sports car with a number plate that says ‘Dhando’.
And he loves to remind everyone of his favourite strategy: “heads I win; tails, I lose little”.
The images above were generated using AI tools.
Quick Takes
+The government has approved a Rs 1,000 crore venture capital fund for the space sector under IN-SPACe. The funds will be deployed gradually over 5 years to fund startups in the space sector.
+India’s manufacturing PMI rose to 57.4 in Oct (vs 56.5 in Sept), and services PMI rose to 57.9 in Oct (vs 57.7 in Sept). This means both sectors saw an output growth compared to the previous month.
+Godavari Biorefineries IPO was subscribed 1.83 times. Retail subscription: 1.71 times. Closed for subscription.
+The gas procurement cost of CNG companies is expected to rise by Rs 2-3 per kg: CRISIL.
+The government is planning to sell chana whole and masur dal at subsidised rates under the ‘Bharat’ grocery brand.
+Waaree Energies IPO was subscribed 76.34 times. Retail subscription: 10.79 times.
+Deepak Builders & Engineers IPO was subscribed 41.54 times. Retail subscription: 39.79 times.
+Retail sales in India rose 5% year-on-year in Sept. Food and grocery saw the highest growth of 12%. Jewellery sales rose 8%, consumer durables & electronics sales rose 6%, QSR and apparel sales rose 5%: RAI survey.
+Hyundai Motor India IPO got listed at 1.33% below its IPO price.
+China cut the key lending (or interest) rates in its monthly meeting in October. The1-year rate was cut to3.1%(vs 3.35% in Sept), and the 5-year rate was cut to 3.6% (vs 3.85% in Sept).
6-Day-Course
Theme of the week: stock exchange
We’ve reached the end of this week’s course that started on Monday. Here’s a test you should take. Get pen and paper!
Question 1:
What is the function of a stock exchange?
-It provides a market for buying and selling stocks
-To determine the value of stocks
-To lend money to investors
Question 2:
Stock transactions on exchanges now happen electronically through computers instead of on a physical trading floor.
-True
-False
Question 3:
Buying shares from one exchange and selling on another for a price difference is called ____________ .
-Hedging
-Arbitrage trading
-Short selling
Question 4:
When selling shares, it is possible for part of the order to be sold at one price and the remaining shares at a different price when selling at market price.
-True
-False
Question 5:
The advancement of computerized trading systems allowed traders to buy/sell shares within milliseconds. This led to the practice of _____________ .
-Swing trading
-Momentum trading
-High frequency trading
Answers:
Q1: It provides a market for buying and selling stocks
Q2: True
Q3: Arbitrage trading
Q4: True
Q5: High frequency trading
The information contained in this Groww Digest is purely for knowledge. This Groww Digest does not contain any recommendations or advice.
Team Groww Digest