I finally got my hands on a copy of Mosaic, and I read through it in one sitting. As Pabrai mentions in the introduction,
my perspective on writing is simple:
1. Only write about subjects one is passionate about.
2. Avoid fluff at all costs.
3. Have no set periodicity for writing
Overall, this makes the entire book a very great read. Unfortunately, it also is out of print and currently goes for $388 on Amazon. So below are the notes I took. The material from the book is in italics, and is still mostly in Pabrai's original words; sentences in brackets are my additional commentary.
The future of a business is never assured. There are always the super-low probability events. Attribute a small probability to cover for this. (ie: fraudulent accounting, meteor-strike, etc)
Avoid shorting- going against the 8 to 10% long run return of the market. More importantly, an overvalued company can naturally boost its own intrinsic value by issuing inflated stock, and you are always vulnerable to a short squeeze.
[There is usually also an additional charge from brokers for shorting, usually at about 3% per year. Overall, shorting is usually a bad proposition]
There is currently a broad tectonic shift going on- businesses are profiting while jobs are being outsourced, but white- and blue-collar wages are eroding.
[I think understanding this is very important, and I'm going to write another post about this]
Investment managers are introverted, skeptical, and very analytical
CEOs are extroverts, optimists, and leaders.
You must have a comfortable understanding of both perspectives- know the uncertainties of running a business and the importance of capital allocation and Return on Equity.
Retailing is an arbitrage between what customers want and how it can be provided to them. In general it is a terrible business because there are no trade secrets and it is difficult to assess "need". The less dependent the retailer is on fashion trends, the better.
[This third point will also be brought up in another post soon]
Problems Microsoft is facing:
1. Highly dependent on two products, Windows and Office, for all of their operating profit.
2. They face competition from themselves- their products are not getting much better.
[I feel there is probably a lot of situations where one of these problems would apply for a company]
Look at the "DNA" of your companies- a culture is hard to change. If you cant understand the financial statements, management probably does not want you to.
Some quotes from Warren Buffett on investment management:
"We don't get paid for activity, we get paid for being right. As to how long we'll wait, we'll wait indefinitely!"
"The way people extrapolate the future is stupid. Not just slightly stupid, but massively stupid."
"The best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results delivered by the great majority of investment professionals."
On avoiding fraud:
1. Avoid obtuse financial statements
2. Look out for "managed" earnings
3. Take into account when "restructuring" becomes the norm
4. Be wary of earnings guidance
5. Look at related party transactions, compensation, options
6. Try to find integrity in management
[If you want to see some of these, look at the financial industry today. They have very unclear financial statements, managed earnings, lots of "restructuring" charges, and earnings guidance which keeps being completely off]
Things to look for in management:
-lack of an ego
-speak the truth
-love for the company
-capable and energetic
In summary, look for situations where high uncertainty about the business leads to a very attractive risk proposition for shareholders.
Finally, he also recommends two books:
The Innovator's Dilemma by Clayton Christensen
The Origin and Evolution of New Businesses by Amar Bhide