Mohnish Pabrai: Invest In Anomalies

During a recent talk at Clemson University, legendary value investor Mohnish Pabrai generously shared his investing framework for identifying and profiting from extreme market mispricings. 

At its core, Pabrai’s strategy involves diligently screening global markets for pricing anomalies that allow him to purchase high-quality assets at irrationally discounted prices.

He started his fund in 1999 with $1 million and now manages $840 million.  

Here’s the full breakdown of everything we learned:

1. Focus on “anomalies.”

   • Look for something selling so cheap it makes no sense. Figure out why it’s cheap. Usually, the market is right, but occasionally, you’ll find an anomaly trading at 10% of its true value or less.

   • Buffett did this with a bet on PetroChina. At the time, earnings were $12 billion, trading at a $35 billion market cap, just 3x earnings. This was a fraction of Exxon and BP’s valuations, so Buffett made a “small” $400 million investment. It quickly tripled. Ultimately, Berkshire made 7x their money on the trade by the time Buffett sold—a home run.

   • Don’t buy if something is only slightly under intrinsic value. If Apple is worth $180 and it’s trading at $150, you can pass and wait for a fatter pitch.

2. Where to find ideas:

   • Pabrai found an anomaly when investing in Reysas, a warehouse operator in Turkey. Turkish stock valuations had plummeted before he invested due to hyperinflation. But the company owns hard assets—real estate, which holds its value even through inflation. The stock was trading at 2% of liquidation value when Pabrai invested. It’s up around 20x since then.

   • He looks at the lowest P/E stocks list published by Value Line. He found some funeral operators listed there trading for 2x earnings, where he made 5x on his money in a year. They were temporarily bogged down by some debt they used for acquisitions at the time. But funeral homes are stable businesses with predictable cash flows. So he made the investment.

   • Search 13F filings of other professional investors. Don’t copy their trades outright, but understand what the smartest investors like Buffett, David Einhorn, and Pabrai himself own. Try to figure out WHY they bought when they did. What value did they see at the time? Why does Bill Ackman like Chipotle or Canadian Pacific?? Reverse engineer their trades and see if you agree or disagree with their assessment. Be an investigative journalist.

   • Ignore the markets for the most part. Focus on finding individual companies that are trading at anomaly prices that can survive whatever temporary conditions are going on in the economy.

3. What are some current opportunities he sees?

   • He recently found via Value Line and 13F filings that the stocks of national car dealers are depressed. Three he mentions are AutoNation, Asbury, and Lithia.

   • AutoNation (AN) is down 25% from its peak and trades for just 5.8x earnings. The company is a perpetual stock repurchaser, and they used the recent low valuation to accelerate buybacks—buying 24% of the shares back in 2022 and 6% in 2023.

   • Asbury Automotive Group (ABG) is down 19% and trades at 4.8x earnings.

   • Lithia Motors (LAD) is down 29% and trades at 7.6x earnings.

   • The auto manufacturing industry is challenged due to fierce competition.

   • But he still likes auto dealers. The demise of the big auto manufacturers will take years. Meanwhile, auto dealers have four revenue streams: new cars, used cars, financing, and parts & service.

   • New cars aren’t a great business because supply is constant, and buyers are extremely intelligent about pricing now. But used cars, finance, and service are still strong—especially service.

4. Invest in relationships

   • He paid $650,000 for lunch with Buffett in 2007.

   • Following Buffett's teachings, Pabrai had made $84 million by then, so he figured it was worth it to bid for the lunch to say thank you.

   • The lunch has paid dividends ever since, turning into a relationship with the late Charlie Munger and being invited to exclusive Berkshire brunch at the annual shareholders’ meeting.

   • The price of the lunch has skyrocketed to over $19 million.

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