Some notes on Mohnish Pabrai's latest interview with Meb Faber:
23:15 Log scale of compounding
The power of compounding isn't intuitive to humans due to its logarithmic nature - the impact of reduced errors and even incremental consistent returns is exponential over a lifetime. This is our objective in providing consistent-quality undervalued stock reports to you.
40:00 Hold winners
Pabrai explains the Shelby Davis approach of wide diversification and letting winners run. (This approach seems practical and comfortable to us.) Even though most of Davis' selections weren't successes, a few big winners like AIG built him a fortune.
In our previous blog, we noted it wasn't the hit rate but the quantum of gains of winners that made the results worthwhile.
What struck us was the importance of micro-economics and bottom-up research in trumping macro-economics at an economic basket case like Turkey.
59:15 Importance of quality management
Pabrai makes the point that outside USA, quality of management can't be assumed. At the least, it's probably best to have minimum standards of profitability and shareholder-orientation in distressed stock investing.
1:11:45 Inch wide, mile deep
It's not the breadth of your knowledge but your certainty in your area of expertise that matters in investing. We have rigorous financial criteria for a stock to pass our standards, and we strike only when it's right in our zone - these are the stocks we report to you.