Mohnish: On Noise, Emotion, Gold And Change

October 2, 2007 by Joe Ponzio

Before we ever crammed into the conference hall for the meeting and Q&A session, Mohnish was chatting it up with investors and prospective investors (and fans) in the half hour meet-and-greet. I arrived 15 minutes early and the room was already half full (or half empty if you are a pessimist).

At any given time, Mohnish had eight or ten people around him, asking questions that most gamblers have on their minds. It was clear that these people wanted to learn the Pabrai philosophy; still, they did not fully understand the concept of owning $0.50 dollars, looking at individual businesses (not stocks), and knowing that risk was not a function of volatility but of strategy.

I stood behind the circle and listened intently.

The Market’s Noise

One gentleman asked about earnings estimates, interest rates and the “crazy” markets today. As I expected, Mohnish held back a smile as he tried to answer a question that he has probably answered a million times before.

That’s mostly noise.

Most of the earnings reports, earnings estimates, and most of the general news about the markets is garbage. There is a tremendous need to change your perspectives on investing because the traditional philosophies will cost you both money and opportunities.

When you pay $0.50 for $1 worth of assets, be they hard assets or future cash (or both), you are already ahead of the game. No matter what the analysts say nor what interest rates do, so long as you have that margin of safety, you have…safety.

What can hurt your investment? Well, your $1 worth of a business may drop in value and you may find that you had then paid $0.50 for $0.50 (or less) of a business. Noise can’t do that-only micro events that affect your individual company.

Be Cold…Towards Investing, That Is

When asked how he felt when he came across a great opportunity, Pabrai joked:

My wife says I am emotionless. To her, that’s a bad thing.

You can guess where he is going with this: There is nothing exciting about investing. Mohnish explained (and it was obvious) that he is very relaxed and laid back. For the most part, he is very calm. When he sees an opportunity, he zeros in for a few hours to rip apart the company, but there is no emotional response from finding a good or bad opportunity.

I won’t rehash everything I said in The Psychology of Investing, but check out that post for more. Pabrai more or less explained the very same thing.

What About Investments In Gold? Commodities? Complex Businesses?

When asked if he would ever invest in gold (and a few other ideas), Pabrai rehashed something that Buffett had said:

Think like a martian.

Looking down on Earth, what would a martian understand by watching your investments over time? To a martian, it would be very clear what Johnson & Johnson did. There would be no question about Coca-Cola’s business. But what would a martian understand about investments in gold or Google (or other complex businesses in rapidly changing industries)?

Looking down on us, a martian would understand that we take gold out of the ground, clean it, and put it back into the ground (a vault). Sure, there is some production for jewelry and other items. Still, for the most part, we don’t do anything with gold. Where is the value?

When looking at most businesses, we are all martians until we rip apart that business and try to understand it. I don’t understand Blackstone. That is, I don’t understand a company with a core strategy of seeking profit wherever it can rather than having a core business.

Maximize And Love Volatility

Mohnish showed some performance slides. At one point in 2002, his funds were down about 40% in three months. He can’t control the markets; he can only control his actions and let the markets do their thing.

Had you bought Pabrai’s hedge fund at the absolute peak (just before the drop) in 2002, you would have had a 25+% average annual return from then until now. Had you bought at the absolute bottom (just after the drop), you would have had a 40+% annual return.

The point? Volatility does not equal risk. Volatility creates opportunities.

Nothing Changes

The amazing thing about Mohnish is that he doesn’t necessarily have any original philosophies. That is, he considers himself a copycat of the great investors. He takes an “age-old” approach to investing, and applies them today in the “new and different” markets.

In the end, nothing changes. A dollar is a dollar. And if you buy it for $0.50, you’ll make money.

A Note From Joe Ponzio

This section is for comments from F Wall Street visitors. Do not assume that Joe Ponzio agrees with or otherwise endorses any particular comment just because it appears or remains on this website.