Justin’s note: Today’s essay comes from my good friend Nick Rokke, analyst for The Palm Beach Daily. I read Nick’s essays every morning and this recent one was too good not to pass on to you.
Below, Nick shares the details on a proven system you can start using today to beat the market…
By Nick Rokke, analyst, The Palm Beach Daily
Mohnish Pabrai is one of the best value investors you’ve never heard of.
He came to the United States from Mumbai, India with nothing—and built a $70 million fortune.
Most of that came from his firm, Pabrai Investment Funds.
Pabrai is a big admirer of legendary value investor Warren Buffett. In 2007, he made headlines by bidding $650,000 for charity to have lunch with Buffett.
He’s a very charitable man. He and his wife donate at least $1 million per year to various causes.
And he likes giving back to the investment community. One way he does that is by sharing his successful investing system…
His system has beaten the market by 6.3% per year over the past 25 years. If you invested $1,000 in Pabrai’s system in 1992, it would now be worth $47,765. If you put the same $1,000 in the S&P 500 over that span, you’d only have made $9,650.
Here’s why I’m telling you about Pabrai today… His system recently released its 2018 forecast. And anyone can follow it—even small investors. (I’ll show you how in a moment.)
Regular readers know that one of our goals at the Daily is to help you increase your wealth so you can have a dignified retirement.
Following Pabrai’s strategy can be the difference between living off Social Security checks in retirement… and living the good life.
Hunting “Uber Cannibals”
I love finding easy ways to beat the market. Nothing makes me happier.
That’s what attracted me to Pabrai’s system. He calls it hunting “uber cannibals.” Pabrai based the strategy off a quote by Charlie Munger (Buffett’s right-hand man), who famously said, “Pay attention to the cannibals.”
Cannibals are companies that buy back lots of their own stock.
Stock buybacks reward shareholders by shrinking the supply of outstanding shares—making each remaining share more valuable.
Let’s say ABC Company has 1,000 shares outstanding, and the company makes $9,000 in profits. That means each share gets $9 of profit.
If ABC buys back 100 of those shares, that leaves 900 outstanding. If the company makes the same $9 in profits, each shareholder now receives $10 in profits. That’s an 11% boost just from the buyback…
As you can see, share buybacks increase the earnings power of each share.
From 1992–2016, Pabrai’s “uber cannibals” strategy returned an average of 15.5%. And 2017 was another good year, returning 22%.
(Pabrai’s system isn’t impervious to market downturns, though. For example, during the 2008 crash, his “uber cannibals” fell 26%… However, that still outperformed the market, which dropped 37%.)
The best thing about his system is that you don’t have to be a professional investor to use it. Here’s how it works…
Check stocks at the beginning of every April (after most companies have just released their annual reports).
Buy companies that have the biggest buybacks over the past five years.
(Note: Pabrai includes some criteria to make sure he doesn’t buy overvalued or illiquid companies. You can read the full details here.)
Here’s a rundown of his “uber cannibals” for 2018:
Sleep Number Corp (SNBR)
Discover Financial Services (DFS)
Lear Corp (LEA)
Now, as with any system, past performance doesn’t guarantee future results. So don’t bet the mortgage on any one of these companies. Make sure any investment you make fits within your overall investment strategy.
Nick Rokke, CFA
Analyst, The Palm Beach Daily
P.S. You can follow Pabrai’s latest strategy and musings on his blog right here. He posts a couple of his recent presentations or interviews each month.
Today, readers respond to our Dispatch on Tesla:
Tesla has always been a fraud. Electric cars are dressed-up golf carts. The technology is over 100 years old. Elon Musk is also a super con man. Porter Stansberry did a great exposé of this con artist in his newsletter in January 2017.
Tesla’s success was due, in large part, to generous federal subsidies from solar-crazy Democrat elites like Al Gore and others during Obama’s reign. Too bad for Tesla; that party is finally and permanently OVER.
As always, if you have any questions or suggestions for the Dispatch, send them to us right here.
Do you think “PC” culture has gone too far? See this message from Doug Casey…