The Dhandho Investor: Chapter 14

Mohnish Pabrai is an Indian-American businessman and investor. For a number of years, he turned heads with the performance of Pabrai Investment Funds since its inception in 1999. Pabrai has high regards for Warren Buffett and admits that his investment style is copied from Buffett and others. Over the next few weeks, we'll be exploring the topics in his book about value investing.

Many companies are devoted to innovating of some sort, and many investors are looking to find the next big innovation that will generate superior returns on investment. Pabrai argues, however, that investors should focus not on companies that innovate but rather on companies that excel at copying and scaling.

Pabrai goes through a couple of case studies to illustrate his point. Ray Kroc purchased McDonald's restaurant from a pair of brothers. He didn't invent the concept, but saw its potential and expanded it. Furthermore, many of the menu items and processes that made McDonald's into the restaurant we see now did not come from corporate headquarters, but rather from its franchisees and other restaurants. McDonald's is successful because it has been able to scale up the innovations of others.

Microsoft is another company Pabrai describes as a non-innovator that is excellent at scaling up the successful innovations of others. Microsoft's own inventions have often failed, but when it has taken a competitor's existing idea and applied Microsoft's know-how is when it has been at its most successful. It took the idea of the computer mouse and graphical user interface from Apple, Excel from Lotus, Word from Word Perfect, networking from Novell, Internet Explorer from Netscape, XBOX from Playstation and the list goes on. In these cases, Microsoft waited for a product/service to demonstrate a certain acceptance by customers, and then went after this now proven market.

Pabrai Funds is also a copy of Warren Buffett's funds to a large extent. From the fee structure, to the philosophy on identifying good investments, to the reporting scheme, to the investor profiles, to the personnel structure, Pabrai has tried to emulate the partnerships of Buffett's past.

Too many investors make the mistake of looking for innovators in the public equity markets. Instead, Pabrai advises to focus on companies run by people who have repeatedly shown they can lift and scale existing ideas.