Tuesday, June 26, 2007

Mohnish Pabrai: Pabrai’s Perfect Portfolio

Mohnish Pabrai’s portfolio is not perfect because of what is inside, but rather because of how the fund is assembled. Pabrai is the managing partner of the Pabrai Investment Funds, a partnership with $500 million under management. Besides the 29% returned annually to partners, Pabrai has designed brilliant portfolio concepts.

Incalculable amounts of time are spent studying which investments to buy, but very little time is spent thinking about how much. The decision is usually left up to the investor’s confidence in the investment, something that has been shown to be unstable. The truth is, deciding how much to buy can have a large impact on a portfolio, occasionally just as much as what is bought. There are copious amounts of information on what to buy, but very little on how much.

To combat his untrustworthy feelings of self-confidence, Pabrai developed a new “portfolio theory.” I will call it the ten by ten portfolio. Ten investments that each make up ten percent of the portfolio. Pabrai holds between seven and fifteen different investments, but appears to stay close to the ten by ten benchmark. The fund is difficult to proportion perfectly, because a stock can run up before a full lot has been purchased or because a previous position has already advanced.

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