market folly

Value investor Mohnish Pabrai recently sat down for an interview with The Motley Fool and he talked about what he learned from his lunches with Charlie Munger and Warren Buffett.


Charlie Munger's 3 Secrets To Investment Success

Pabrai talked about how Munger revealed 3 things investors can do to be successful:

1. Carefully watch what other investors are doing
2.  "Look at the cannibals" - look at businesses buying back huge amounts of stock
3. Carefully study spin-offs

Point number one is quite interesting as Munger flat out tells you to watch other investors (i.e. 13Fs, 13G's, public appearances, etc), something Market Folly's expanded on in our premium newsletter.  Rather than blindly copying their picks, we'd assume Munger means to use this as a source of idea generation and a starting place to do more work.

The second point (stock buyback) is something that numerous hedge funds take into consideration when evaluating ideas.  Steve Mandel of Lone Pine Capital is said to be a fan of 'share count shrinkers'. 

Lastly, the third point (spin-offs) is an excellent place to source ideas and Joel Greenblatt talks about spin-offs in his book.  In fact, many hedge funds buy companies that announce a spin-off and then once the split is complete, hold onto one piece of the company that they like most. 

An example that many hedge funds played was Expedia (EXPE) spinning off TripAdvisor (TRIP).  We'd assume Charlie also meant 'split-ups' and a recent example of that would be Tyco splitting up into PentAir (PNR), Tyco (TYC), and ADT (ADT).  


Warren Buffett's Words of Wisdom

Pabrai relayed a story Warren Buffett told him about his former partner Rick Guerin, who fell off the map so to speak.  Buffett, Guerin, and Munger used to all invest together but Guerin was in a hurry to get wealthy whereas Munger and Buffett weren't.  Buffett's outlined two lessons:

1. Avoid leverage
2. Be patient

Guerin was levered with margin loans in the 1973/74 downturn and received tons of margin calls, so he was forced to sell his Berkshire Hathaway (to Buffett).

So Pabrai described the lesson from Buffett as, "if you're even a slightly above-average investor who spends less than they earn, over a lifetime you cannot help but get rich if you are patient.  And so the lesson was, don't use leverage, right?  And be patient.  These are attributes he's talked about plenty, but I would say that it got seared in pretty solidly after hearing the format in which he put it."



Embedded below is the video of Pabrai sharing what he learned:



For more from these great investors, head to Warren Buffett's recommended reading list as well as Charlie Munger on the psychology of human misjudgment.