With Berkshire Hathaway AGM coming to an end, I felt so fortunate to be able to learn and meet from so many brilliant investors all over the world.
They’ve showered us with immense wisdom and kindness, helping us on our journeys to becoming better investors. I will be writing a series of reflections along the way, and I’ll start by sharing what I’ve learnt from Mohnish Pabrai, who runs Pabrai Investment Funds, a value-oriented investment firm that manages over $1 billion in assets.
During the chat with Pabrai, he shared the secret behind Warren Buffett and Charlie Munger’s success lie in they stick to their circle of competence.
“Circle of competence grows very slowly. Be patient about it.”
He pointed out that Buffett and Munger didn’t invest in Coca-Cola until after 16 years of experience buying See’s Candies.
Without this experience, witnessing its pricing power year after year, they wouldn’t have truly grasped the power of brand and consumer monopoly. Their deep immersion in building their understanding within this circle of competence was crucial for their later success with companies like Coca-Cola and Apple.
In fact, when Buffett initiated his purchases of Coca-Cola, the position occupied 1/4 of his entire book value, which showcased his confident about the size of the bet.
It’s this commitment to going deep and big within their circle of competence that has rewarded Buffett and Munger so tremendously over the years.
Mohnish Pabrai’s Advice on Circle of Competence
Pabrai’s advice in going slow and being patient in building our circle of competence acts as a great reminder for me. Often time, we always want to make investment decisions fast. We want to understand a company/industry fast. We want to make money fast. However, true understanding cannot be rushed.
Building a strong foundation of knowledge takes time to learn and internalize. It takes dedicated effort to deepen our conviction. While the research process can be lengthy, the patience is well worth it. Buffett waited 16 years before investing in Coca-Cola and 44 years before buying Apple, yet he still became the world’s most successful investor.
So why rush to invest when you know all the dots will connect eventually?
As Buffett himself reminded us at the AGM,”You can’t produce a baby in one month by getting nine women pregnant.”
If you enjoyed this post, I’m sure you’ll also love reading about my takeaways from Li Lu, the Warren Buffett of China, as well as William Green, the bestselling author of Richer, Wiser, Happier. Stay tuned for the next blog post to keep learning! Arigato!
