Respected investor Mohnish Pabrai believes that wealth creation in financial markets should be based on the "10 Commandments of Investment Management" to ensure capital protection and growth. However, most of the stakeholders in the investment management business keep violating them and get into trouble.

Pabrai, managing partner of US-based Pabrai Investment Funds, explained these principles in a lecture to students at Boston College's Carroll School of Management.

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Commandment 1: You should not skim off the top

Pabrai believes it is wrong to have a fee structure in asset and wealth management. Most money managers charge a certain percentage of fees as a fixed fee, and hedge funds usually charge 1-2 per cent of the top amount and an additional performance fee. He singles out Warren Buffett and Charlie Munger in particular, who practised the art with no additional fees.

According to Pabrai, investment managers should first practice the art with their own limited assets before managing other people's money. "With the power of compound interest, even a small amount of money can grow significantly larger within a few years. If you compound from 15 to 20 to 25%, which you should do with small amounts of capital, your money will double every 4 to 7 years. In this way, you can practically live off this base while the assets continue to grow," he says.

Commandment 2: You should not have an investment team

According to Pabrai, investment management is not a team sport, but an individual matter. Two people will have different circles of competence, which is why it does not make sense for a good investment manager to have analysts on his team.

It is very likely that an analyst will have some investment ideas that will be rejected by the different expertise of the individuals.

"Secondly, you don't need that many stocks in a portfolio. In a year, you have enough time to research stocks and find two, three, four that suit you," he said. Pabrai said the investment analysis process is the fun part of the job that an investment manager does not want to delegate to others.

Commandment 3: You should accept that you will be wrong a third of the time

According to Pabrai, investing is a very inexact science and it is an extremely difficult task to extrapolate the future of many companies. He believes that four out of ten companies will not behave as expected in the future because they can be affected by various factors. So you have to accept that even the ideas with the highest conviction may or may not live up to expectations.

Commandment 4: You should look for hidden P/E stocks with a factor of 1.

The experienced investor believes it is best to look for stocks based on future earnings or hidden earnings trading at a 1x multiple. "If you can buy on these terms, you have a good chance of success. Looking for the hidden P/E ratio is a really good exercise," he says.

Sharing his own experience, Pabrai said when he bought Fiat Chrysler, he was trading at less than USD 5 a share and the company had a forecast for the number. The P/E ratio of 1 came in and the investment has increased 7-8 times in that time.

Commandment 5: You should never use Excel

According to Pabrai, the use of Excel should be avoided when making investment decisions. "The investment process is simple and you should not use an Excel spreadsheet to find out if an investment is worthwhile. If you can't figure it out in your head, it can't be a great investment. If you reach for Excel, take your passport and go," he advised.

Commandment 6: You should always have a rope to climb out of the deepest well

Pabrai said one of the biggest lessons he has learnt in the investment business is that there will be periods of ups and downs where sometimes performance will be great and sometimes it will not. Companies will always have turning points and setbacks, but there will always be a way to deal with them.

Using his own example, Pabrai said during the global financial crisis, his company hit rock bottom in March 2009 from a peak in June 2007 when assets fell between 65 and 70%. But he did not lose hope and found a way out of the crisis. He encouraged investors to always believe in their abilities as there will always be a rope to climb out of the deepest hole.

Commandment 7: You Should Be Focused on a Goal Like Arjuna

According to Pabrai, the golden rule for investment management is to be focused and determined like Arjuna from the Indian epic Mahabharata.

"It is necessary to focus on business and only business," he said.

When looking at a company with a P/E ratio of 1, several issues usually arise, including macros. Pabrai says if we can look past these concerns, there are many opportunities. Investors just need to focus on these opportunities and ignore the noise around them.

Commandment 8: You should never sell a share

Pabrai believes that short selling stocks can at most double, but often against an investor. Even pundits like Warren Buffett and Charlie Munger have noted that they always had the right hunch when selling stocks, but always the wrong timing. "The best thing you can do is double your money, and the worst thing you can do is go bankrupt. This is the opposite of what you want. There is no point in placing bets where the biggest advantage is doubling and the biggest disadvantage is that you are out of the game," he said.

Commandment 9: You should not be leveraged and neither a long-term lender nor a short-term borrower

The value investor states that there is no place for leverage in life. The most important thing is to spend less than your income. "In order to cross the finish line first, you have to finish the race first, on the track that you want to stay on for a very long time," he said.

Pabrai stresses the importance of not getting too cocky.

"If you have calculated with an astronomical rate of increase, but in the following years you have only realised a 0% rate, your compounded rate of profitability over the years is now de facto only 0%," he says.

Commandment 10: You should be a shameless cloner

Pabrai believes that cloning is very good for the health of an investor. He believes that there are many smart people with very good ideas who should be followed because they are indeed great investors. "In many cases, their portfolios are visible to us because it is required by law, and from there they provide a good passe to use as a template and learn from them," he says.

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About Alexander Kelm

Alexander Kelm is a passionate value investor and runs the website Wall St. Nerd. Here, the passionate value investor writes in-depth articles on the topic of Value Investing. Value Investing involves analyzing a company's fundamentals and can be characterized by an intense focus on a stock's price, its intrinsic value and the relationship between the two.

Alexander Kelm offers online courses on stock investing.

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