Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Is Central Asia Metals A High Quality Contrarian Stock?

Published 23/02/2020, 06:53
Updated 09/07/2023, 11:32

Mohnish Pabrai is a popular figure on the US investing scene. After immigrating to the US from India in the 1980s he studied engineering and later worked in IT. From there he started his own business before selling it in 2000 for a reported $20 million.

These days he’s better known for running Pabrai Investments Funds, currently with $575 million under management, as well as a zero-fee investment firm called Dhando Funds. He’s also written the books The Dhandho Investor and Mosaic: Perspectives on Investing​.

In the Dhando Investor, Pabrai explains that the core of his strategy is based on the ideas that: “heads I win, tails I don’t lose much”. That means picking investments where there’s a wide margin of safety and the upside overwhelms the downside. More specifically, Pabrai - who often stresses the importance of using investment checklists - sets out a 9-point Dhando framework:

  1. Focus on buying an existing business (rather than backing start-ups or firms with unproven models)
  2. Buy simple businesses in industries with an ultra-slow rate of change (which are often unloved and potentially underpriced by the market)
  3. Buy distressed businesses in distressed industries (where the margin of safety may offer attractive value opportunities)
  4. Buy businesses with a durable competitive advantage (the very profitable moat-like strengths that Buffett is so fond of)
  5. Bet heavily when the odds are overwhelmingly in your favour (be patient and wait for Mr Market to serve up attractive investments)
  6. Focus on arbitrage (special situations where businesses for some reason become super-profitable for short periods of time)
  7. Buy businesses at big discounts to their underlying intrinsic value (in the classic value strategy, the aim is to buy stocks cheaply rather than overpay)
  8. Look for low-risk, high-uncertainty business (where the downside risk is low but the market underprices them because it doesn’t fully understand the business or its outlook)
  9. It’s better to be a copycat than an innovator (prefer stocks that can execute a proven idea or business model better than others)

The thrust of his strategy is to be patient and wait for value opportunities to be presented by the market, even if they are rare.

Applying Pabrai’s approach

To get started with his kind of contrarian approach, you could use a screen looking for both attractive value and reasonable quality in mid- and large-cap shares trading near to their 52-week lows. At Stockopedia, we call high Quality-Value stocks Contrarians.

Applying Pabrai’s Approach

When we run this screen, we find that Central Asia Metals (LON:CAML) qualifies. Unsurprisingly, our algorithms classify Central Asia Metals as a Contrarian stock - this is a winning StockRank Style. It's a promising sign, although, it's worth remembering that, like many value investing strategies, Mohnish Pabrai’s Buffett-inspired approach to finding investments relies on going where others fear to tread.

In uncertain conditions, where stocks can be marked down sharply, value strategies like this are proven to be very profitable. But more broadly, the attraction of Pabrai’s framework is its simplicity and focus on buying shares where the investor has a circle of competence.

Studies indicate that combining factors such as Value, Quality and Momentum is a more effective way of outperforming the market over longer time frames. That's why we have constructed our StockReports to give an instant impression of how well exposed Central Asia Metals is to these three factors. We go into greater detail on factor investing in this video.

Disclaimer: These articles are provided for information purposes only. The content is not intended to be a personal recommendation. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser. The author has no position in the stocks mentioned, unless otherwise stated.

Original Post

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.