Wednesday, February 20, 2013

There is no such thing as a value trap. There are investing mistakes.

An interview with Mohnish Pabrai
There is no such thing as a value trap. There are investing mistakes. If you bought financials in 2008 and lost money, you lost money for a very good reason. Basically, the books had liabilities that unfolded, which were not in the projections; they were not in your analysis. John Templeton used to say that there is no investment manager who is going to be right more than two times out of three. Even if you look at Buffett, Berkshire Hathaway owns 80 companies. If you look at each of the 80 buy decisions, which are independent decisions, at least 40% of them have not met his expectations. They are perhaps an outright loss of capital or they are producing such poor returns that it was a mistake. If you look at it from the point of view of dollar weighted, probably 90% of them have been good decisions. But if you look at each of the 80 decisions as each being equal weighted, the error rate exceeds the one-third that Templeton talks about. There are other mistakes like mistakes of omission where we should have bought something and we didn’t. We sell something, it goes up in price. What we buy doesn’t go up in price as much. These are all mistakes.