Unravelling Mohnish's Hidden Moats

I want to start off by saying that I'm a huge fan of anything that Mohnish Pabrai says. Why? Because he simplifies things so well a simpleton like me can understand it easily, and his advice is easy to begin implementing right away.

But... You can still dig deep into what he says and try and break it down into smaller parts for further investigation. This is what I plan on doing here.

First, he broke down investments into 3 main categories:

1. Discounted pies. Value investments. It’s not gonna grow much or at all.

2. Obviously great businesses. Growing pies, but the whole planet knows they are growing.

3. Hidden moats, where very few humans can understand it.

He had a great lecture at Harvard Business School and said:

"I don’t want any more discounted pies. I want growing pies. I don’t want cheap discounted pies that are not going to grow. 5x is for losers. I’m going for 10x. I want growing pies, and I want that pie to be a 10x in 5 years. Once you set that benchmark, life becomes really simple. Because most things don’t make the cut.

In 2019, I made 3 investments, and even in the age of corona I am really happy with 2 of them. The third one I think we’ll still do OK on. In 2020, I made one investment I’m really happy with – nice straight 10x in 5 years. Nice moat.

Mohnish Pabrai – April 7th, 2020"

When I think about this a few things struck me like lightning.

1. He isn't looking to do the typical Benjamin Graham style value investing at this point. He's done it in the past very successfully, but he feels that he can make more money looking for hidden moats.

2. Category 2 is awesome, and if you can find those at a cheap price, then you're going to make a crap tonne of money. The issue is, everyone knows about these companies because they're well covered by analysts and the news. So buying these at even a fair price is next to impossible.

This leaves hidden moats. The one issue I have with it for my own investing is finding things "where very few humans understand it." I'm trying to get to this point and it builds on the point that you must invest in areas that you feel are in your circle of competence. If you aren't able to clearly understand why/how a company can unlock or grow to massive value, you'll never know if XYZ has a hidden moat.

Finding good investments with hidden moats comes down to cloning what people smarter than I am are already doing, then studying these companies more to find if I can understand their logic behind the investment. This usually takes quite a while, so if you're just jumping into investing, take your time, there will always be opportunities.

When Mohnish talks about Hidden Moats (which is often) I always think about one of my favorite books 100 Baggers by Chris Meyer. I highly recommend the book and he also has a great blog that I highly recommend. Anyways, hes mentioned two main things for finding 100 baggers that he'd focus on if he re-wrote his book:

1. High ROE (20% +)

2. Ability to reinvest intelligently.

If you can find a company that meets these two criteria I can't guarantee you a 100 bagger, but it'd be pretty hard for that company to turn into a pile of dog crap. Good management is huge here. Because you can have high ROE companies that just give their earnings back to shareholders via dividends/buybacks, buying company jets, or (hopefully) they may invest in growth.

Generally, the companies that have the most growth potential will be putting the returns it gets each year from running and putting it back into the company to generate yet even more earnings. This basically lets the company compound its earnings on itself which results in a continuous loop of monetary gains.

If you find anything that meets these criteria feel free to e-mail me kylesgrieve@gmail.com