Mohnish Pabrai is a popular figure on the US investing scene. After immigrating to the US from India in the 1980s he studied engineering and later worked in IT. From there he started his own business before selling it in 2000 for a reported $20 million.
These days he’s better known for running Pabrai Investments Funds, currently with $575 million under management, as well as a zero-fee investment firm called Dhando Funds. He’s also written the books The Dhandho Investor and Mosaic: Perspectives on Investing.
In the Dhando Investor, Pabrai explains that the core of his strategy is based on the ideas that: “heads I win, tails I don’t lose much”. That means picking investments where there’s a wide margin of safety and the upside overwhelms the downside. More specifically, Pabrai - who often stresses the importance of using investment checklists - sets out a 9-point Dhando framework:
- Focus on buying an existing business (rather than backing start-ups or firms with unproven models)
- Buy simple businesses in industries with an ultra-slow rate of change (which are often unloved and potentially underpriced by the market)
- Buy distressed businesses in distressed industries (where the margin of safety may offer attractive value opportunities)
- Buy businesses with a durable competitive advantage (the very profitable moat-like strengths that Buffett is so fond of)
- Bet heavily when the odds are overwhelmingly in your favour (be patient and wait for Mr Market to serve up attractive investments)
- Focus on arbitrage (special situations where businesses for some reason become super-profitable for short periods of time)
- Buy businesses at big discounts to their underlying intrinsic value (in the classic value strategy, the aim is to buy stocks cheaply rather than overpay)
- Look for low-risk, high-uncertainty business (where the downside risk is low but the market underprices them because it doesn’t fully understand the business or its outlook)
- It’s better to be a copycat than an innovator (prefer stocks that can execute a proven idea or business model better than others)
The thrust of his strategy is to be patient and wait for value opportunities to be presented by the market, even if they are rare.
Applying Pabrai’s approach
To get started with his kind of contrarian approach, you could use a screen looking for both attractive value and reasonable quality in mid- and large-cap shares trading near to their 52-week lows. At Stockopedia, we call high Quality-Value stocks Contrarians.
When we run this screen, we find that Northgate (LON:NTG) qualifies. Unsurprisingly, our algorithms classify Northgate as a Contrarian stock - this is a winning StockRank Style. It's a promising sign, although, it's worth remembering that, like many value investing strategies, Mohnish Pabrai’s Buffett-inspired approach to finding investments relies on going where others fear to tread.
In uncertain conditions, where stocks can be marked down sharply, value strategies like this are proven to be very profitable. But more broadly, the attraction of Pabrai’s framework is its simplicity and focus on buying shares where the investor has a circle of competence.
Studies indicate that combining factors such as Value, Quality and Momentum is a more effective way of outperforming the market over longer time frames. That's why we have constructed our StockReports to give an instant impression of how well exposed Northgate (LON:NTG) is to these three factors. We go into greater detail on factor investing in this video.
Stockopedia helps you to identify return-enhancing factors such as Quality, Value and Momentum by analysing thousands of data points every day. To find out more about you find investment opportunities and analyse your portfolios then take one of our two-week free trials and have a look around.