At the end of January, value investor Mohnish Pabrai held a virtual Q&A session with Clemson University students. In the 45-minute session, the investor discussed what he called the “second-highest period of learning and growth” he’s experienced as an investor.
Last year was a period of learning for Pabrai, and he’s attributed the bulk of this learning to his “good friend” Nick Sleep.
Sleep ran an investment partnership I’ve covered before on this blog: The Nomad Investment Partnership.
The partnership was active between 2001 and 2014. It returned 20% per annum gross during this period.
Nomad’s overriding goal was to find and sit on good businesses. When it was dissolved in 2014, the firm had around 40% of assets invested in Amazon, with the remainder in Costco and Berkshire Hathaway.
Sleep believed that the best investors were not really investors. Instead, the best investors were “entrepreneurs that didn’t sell.”
Walmart was a good example. As Mohnish Pabrai explained in his Q&A session:
Walmart went public in 1970. From 1970 until now, which is more than 50 years, the Walton family has held the stock. They haven’t sold. They’ve just held the stock. But there have been no public market investors that have held the stock for this 50-year period or even a 40-year period or even a 30-year period. Maybe not even 20-years.”
This is a vastly better way to invest, the value investor stated. Trying to continually find new ideas, selling stocks when they reach an estimate of intrinsic value, and buying new ones, which one considers cheap, is an “inefficient” and “treadmill” way to invest.
A better method would be to find great businesses with long runways for growth and hold those stocks. “We should think of ourselves as if we were the founders or the family that owns or runs the business and have the same mindset,” Mohnish Pabrai explained.
He went on to add, “as long as the moat is widening, as long as things are getting better, we shouldn’t be focused on valuations.”
Today, Mohnish Pabrai continued, Sleep is “not doing much work.” He put the number of hours work the investor was completing every year at 100. He still holds those core stocks.
Sleep’s performance showed that it’s possible to achieve similar, if not better, profits by spending less time on the “treadmill.”
That was Pabrai’s most significant lesson in 2020. As he summarised in the Q&A session:
“When you identify and find these exceptional and great businesses, which have very high returns on equity and very long runways as well as great managers…you go all in. Ideally, you try and find them small, and then set it and forget it.”