How I plan to clone the man who cloned Warren Buffett

It has often been said that imitation is the ultimate form of flattery. If that is the case, there is no greater flatterer of Warren Buffett than legendary Indian-American investor Monish Pabrai. He has become known in some circles as “the Oracle of Irvine” and just like his hero, the Oracle of Omaha, he has shown an almost clairvoyant ability to produce superior returns. In fact, a $100,000 investment in July 1999 in Pabrai Investment Funds (in fact, minimum investment is $2.5m) would have been worth $1.8m by March 2018. Pabrai is shameless about the fact that he has cloned Buffett’s approach almost to a tee. I will now shamelessly admit that I fully intend to clone his approach and will explain how. 

Say no to almost everything 

Like Buffett, Pabrai sifts through hundreds of companies at lightning speed. He often does this by reading annual reports and other financial information. Both of them are often looking for a reason to say no. Why? Because the type of company that would justify investment is an extraordinary business and there aren’t too many of those lying around. 

I try to search for companies that I believe have a durable competitive advantage in the long term. In other words, companies I believe will be around and thriving in the next 30 years. This is because my investment horizon, like Buffett’s or Pabrai’s, is for life. If I don’t think the business has that type of longevity, I steer clear.

“Heads, I win; tails, I don’t lose much“

This quote by Pabrai encapsulates a simple but profound idea: the price paid for the stock must be at such a large discount to the underlying value of the business that it provides a margin of safety. Simply put, I have become a bargain hunter. This is easier said than done in a world where hype drives some companies to insane valuations but it has been crucial to the success that Buffett and Pabrai have enjoyed. It also means a lot of waiting around because opportunities to buy great businesses for pence on the pound don’t come often.

Extreme concentration 

Charlie Munger once said that “a well-diversified portfolio needs just four stocks“. Munger is Buffett’s long-time partner and therefore also a hero of Pabrai’s by association. Pabrai has taken this advice quite literally. In 2015, half of his fund was in just two investments – General Motors and Fiat Chrysler warrants. When Fiat’s stock surged, he made seven times his money in six years.

It’s an extreme example but there’s a lesson here. The idea I’ve implemented from this is to focus on a few very good, intensely researched ideas. Diversification has been used with great effect by great investors such as Ray Dalio. Index funds offer great diversification too. However, when picking individual stocks, I’m searching for just a handful of the absolute best stocks. While I still hold a part of my portfolio in index funds, the part that consists of individual stock picks contains just six painstakingly researched businesses.