The Rules for Mohnish Pabrai’s ‘Free Lunch’ Portfolio
The Free lunch Portfolio has managed an astounding return of 17.1% over the last 17+ years. To achieve this, the portfolio is a combination of three separate (and extremely powerful) investing strategies. These three portfolio’s are:
What you may not know is that these three portfolio all outperformed the S&P 500 from the year 2000 - 2017. Not only did they outperform, but they all destroyed the S&P 500 by a minimum of 8% each year.
What happens when you combine the three?
It appears to be best of both worlds; You get well above market returns, beating the S&P by 11.7% on average over the last 17+ years, while simultaneously lowering your volatility.
How to get a ‘Free Lunch’: The Portfolio Rules
To make any portfolio truly great, you have to minimize both activity and cost. This portfolio does both very well. The rules are simple:
Step 1: Go here or to ChaiWithPabrai.com in late December or Early January each year to see the official stock list. (April for the Uber Cannibals list).
Step 2: Invest equally in all Fifteen stocks in early January.
Step 3: Rebalance according to the guidelines below.
Rebalancing the Portfolio
Mohnish publishes the list for the Uber cannibals portion of the Portfolio in April on his website. This is when you would sell the Uber stocks that are no longer on the new list and the invest the proceeds equally across the new Uber Cannibal picks. In January 2019, the Shameless Cloning and Spinoffs will be updated and you’ll follow the same rules as with the Uber Cannibals; Sell the companies that do not make the new picks and invest the proceeds equally in the updated list of 10 stocks.
Side Note: If you’re first year investing in this strategy doesn’t quite line up with a full year, don’t fret. After your first cycle is complete your second year will line up perfectly if you follow the rules stated above.
Tax Advantage: If you live in the USA you may want to hold the stocks that have increased for a year and a day, and sell the losers before the year is up, to take advantage of long-term capital gains tax (but speak to an accountant for more than just my seriously lacking accounting knowledge).
Conclusion
There you have it. Our favorite investor has delivered for us again, proving that there is in fact, such a thing as a Free Lunch. And seriously, if you look at the impact this has on an average portfolio, it’s hard not to drool at the offerings on the table.
As always, do your own research and due diligence before making any investment decision. Speaking of which, Here are the original articles written by Pabrai, posted on Forbes:
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