How Mohnish Pabrai DESTROYED The Market By 1,204% (MUST Watch Interview)

the first thing a investor ought to ask themselves before they buy a stock uh even before we get to price and so on is buying a stock uh is is a far more complicated activity than most people seem to think so what's happened with the development of markets is on a smartphone or a tablet or a laptop we can in seconds buy one of thousands of companies and uh there's no effort required to buy a stock no effort required to sell a stock but uh in order to do well one really needs to understand the underlying business and to have a point of view on kind of where that is versus the the market capitalization so I'll give you an example uh many times in the US like I'll go to my health club for example and one of the members will ask me hey Mish uh should I buy Apple should I buy Apple stock and I turn the question around to them I say uh hey John what's the market cap of Apple and they look at me with a puzzle look they said the stock is at 170 I said no no what is the market capitalization and they don't know okay so the first thing if you're going to buy if you're going to go buy some rice in the market you're going to know what is the price per kilogram so the first thing is that if you're going to buy a stock at least know what you can buy the whole company for for and most investors don't have that knowledge which is amazing and so the first the first thing a investor ought to ask themselves before they buy a stock uh even before we get to price and so on is is this within my circle of competence now circle of competence is a very important concept one of the most important Concepts in investing a person like Warren Buffett would consider something like 95% of stocks outside his circle of competence and uh he says that you know probably 97 98% of things that show up on his desk go into a box called the two hard pile he can't figure them out okay so there's just a sliver of businesses now if Warren Buffett can't figure out 95% of businesses for the rest of us humans we can't figure out 99% of them so most things are going to be outside the circle competence of most investors so now let's say an investor answers question correctly yes I understand apple and I understand it's within my circle competence right so the next question then comes up is the question I asked what could you buy the whole company for and then the second question investor should ask is so let's say investor knows apple is worth a trillion dollars for example so the question I would ask them is that if your family had a Fortune of 4 trillion would you be willing to put 1/4 of that fortune into apple and if the answer is yes buy the stock if the answer is no don't buy a single share and so these are just very simple which is you know look at your net worth look at your family's fortune and are you willing to put a quarter of it buying the whole company that you want to buy 100 shares off and so these are basic things that most investors unfortunately uh don't focus on and so I feel that uh investing in stocks figuring out you know what they're worth uh what your circle of competence is these are complicated issues so for most investors it's a really good idea to index uh because indexing you can buy uh nifty50 index or any broad index in India uh for basis points you know the the frictional cost for ETFs and all is very low and and the second is you average out over time so every month when you get your uh your salary check take a small portion first put it into fa savings and then don't worry about it uh what I would say set it and forget it fill it shut it forget it Theo hondai yeah exactly and uh so that's why I think that buying stocks uh should really be an exception rather than the norm okay uh the second topic uh and before we move on to the more nuanced investor a second thing that I wanted to talk to you about again we discussed this on on email about this whole notion of stop loss that you that you find amusing in India because apparently in the US nobody deals with the concept of stop- loss now let me tell you a peculiarity here Mish because we do this day in day out for a living a lot of technical experts who come in give stop losses they are mandated too as well because it's a trading that they have they don't care about the fundamentals they only bothered about the charts right you would still believe that the notion of a stop- loss from a serious Investor's perspective should be done away with we don't find too many people talk about stop losses if they are serious investors but you believe that there is enough and more talk about stop loss happening on fundamental investing as well that's right so so just to clarify uh we're not talking about the speculators and Traders so uh more power to them more uh but but when we come to investors uh I I actually find plenty of pundits on on uh on TV who have done fundamental analysis and they give targets and they give stop losses and uh and I find that really so uh the the nature of markets so one of the reasons why we can make a lot of money in equity markets is because they're auction driven and auction driven markets are very different from almost any other kind of market so to give you an illustration let's say I bought a flat in Mumbai for 1 CR I don't know if we can get one for 1 CR or not but let's let's play along uh we got one maybe in the in the periphery of Mumbai Okay so we paid a CR for for the flat and we did research and we found that it's the right price and we bought it and uh now we want to know how the price of that flat changes every day so I have a friend who is a real estate broker and I tell my friend the real Brer listen we're going to have chai with pabra every day you and I going to have a cup of tea and every day just come and tell me what the price market price of my flat is okay so you bought the flat next day you invite your broker friend and he says so I ask him so what's the price on my flat he'll say uh listen idiot it's still one CR okay I call him after two days he's still say still one CR and after maybe two months he says you know uh a little change in transactions it's actually 1. 05 crores now it's 1. 05 crores it's gone up a little bit and if you did this every day and you just wrote down the price he was giving you and did it for 365 days you would at the extreme end find it went to somewhere between 95 lakhs and maybe 1.

1 crores or 1. 15 crores in that range right now let's say my flat is a listed company on the Bombay Stock Exchange but the only asset is this flat and every day the price is doing whatever it's doing in the market and we chart that daily price movement what we're going to find is in a 52 we period the range may be something like between 70 lakhs and 1.