Mohnish Pabrai is an Indian-American investor. This article is based on the lecture given by him( Mohnish Pabrai ) at Perking University (Guanghua School Management). The link to the video is available here.
He has written two books named Dhandoo investor & Mosaic.
He started investing when he was 30 years old without attending a single class on investing with $1 million & aims to reach $1 billion by age 60 years which requires a CAGR (COMPOUNDED ANNUAL GROWTH RATE) of 26%. He also runs a foundation called DAKSHANA FOUNDATION.
5 types of businesses which can be multi-baggers-Mohnish Pabrai
1.EXTREMELY WIDE & DEEP MOAT BUSINESS
Moats means a castle surrounded by water that has piranha fish or a strong defense to protect it.
This is a business that is very well established, has years of history or mind share of consumers (Cadbury). It’s very difficult for competitors to compete or even sometimes enter the market.
EXAMPLE: COCA COLA LTD, VISA LTD, MOODY LTD, CRISIL LTD, ETC
2.NEED A PRO OR EXPERT OR ALPHA MANAGER RUN THE BUSINESS
Some companies or businesses cannot be run by idiots. These operations are very specialized and very competitive. The entry barriers are very less or have cut-throat competition in the industry.
EXAMPLE: HDFC LTD, HDFC BANK LTD, KOTAK MAHINDRA BANK LTD, MOTHERSON SUMI SYSTEMS LTD, ETC
Dhando investor: https://amzn.to/2CtWKdI (free audiobook version available)
3. MARKET GETTING CONFUSE
This is low risk & high uncertain business; where the future growth or earnings cannot be predicted or the market is fearful about the future path of the business.
But in this kind of business, there are other factors that reduce the risk of bankruptcy-like property, plant, equipment, stocks, share, patents, etc. But which can also provide a huge return.
Example from Mohnish:
There was a Steel company having a market capitalization of $2.5 Billion, cash of 900 million, contract for 2 years of worth 650 million in each year, and no forecast for the future.
The company can even go in a loss in the third year because of the cyclicality of the industry. After first buying; the company forecasted that they have one more earning visibility of 650 million.
The market price when he brought like $45 in one year it doubled to $70; then in the third year halfway the company was acquired by another company for $170 a share –Simple 4 baggers in 2.5 years.
4.BANKRUPTCY, REORGANIZATION, SPECIAL SITUATIONS
These are businesses that have arisen from the odd or uneven situation. One of the best examples is SATYAM (later acquired by MAHINDRA now know as TECH MAHINDRA).
Example from Mohnish:
SAM ZELL (Mohnish calls him grace dancer). He is an American investor and author of the book AM I BEING TOO SUBTLE.
Mohnish considers him and all other big investors to be experts on US tax code.
The example goes this way there was an insurance company that went bankrupt in 1990 which had net operating losses (NOL) of 630 million; SAM bought it at 30 million in the year 1998.
Then he joined a Transportation company that was highly profitable. But later the transportation company also went bankrupt which resulted in (bankruptcy)bankruptcy resulting in 800 million in NOL.
NOL means operating losses in the past years.
In India also businesses or companies can carry their operating losses for approximately 8 years. In order to set off against profits in the future years.
Later he found a Waste recycling company (which converted garbage into electricity). This company had 2 billion in assets & 2 billion in debt; they bought it for 30 million.
They did lots of changes in the company did two right issues and returned this company to profitability. The stock went from $1 to $40 in a few months.
Buy here: AM I BEING TOO SUBTLE
5. UPSIDE HIGHER & LOWER DOWNSIDE
There are companies or businesses which have a lower downside but a huge upside. This means a company may have a huge order book, a small stake in huge non listed companies, huge assets, etc.
The most important thing in this type of company is that the normal business operation is going smoothly & the management is of high integrity. There is something in the company which will trigger the valuation.
Example from Mohnish:
Before the DOTCOM bubble busted all the tech stocks were just going up, up, & …..up & the valuation also went insane.
But there was a bank called SILICON VALLEY BANK that had received warrants from these companies for various services provided to them, but the value of warrants was never disclosed by the bank.
Also, the normal working of the bank was smooth and was available at a good valuation.
So as the bubble started busting the bank started disclosing the warrants & stock gave 2.5 times return in 2 years & went to 5x return in 3 years
WARRANTS: Warrants are a derivative that gives the right, but not the obligation, to buy or sell a security—most commonly equity—at a certain price before the expiration. Warrants that give the right to buy a security are known as call warrants; those that give the right to sell a security are known as put warrants.