Getting Rich from '50% Off' stocks Mohnish Pabrai way

 If you are knew to investing and have not heard of Mohnish Pabrai, I recommend you check him out. He's one of the world's most prominent value investors who learnt on the footsteps of Warren Buffet and Charlie Munger.

He has a very simple thumb rule to ensure building long term wealth, a little too simple when you hear it. He say's to build long term wealth all you need is to invest in companies that are trading for half the price they are worth with the hope that within 3 years time the market would value them fairly.

Let's look at why this makes sense and see how we would build considerable wealth long term with this approach.

Consider a stock A that is worth $100 but is currently trading only at $50/share. 

Let's say we invest $1000 in this company and sell it 3 years later for $2000. This gives us an annual return of 26% as below:

(2000÷1000)^(1/3) − 1 = 26%

What's so special about 26% annual return? 

To get an intuitive sense of why 26% annual return builds long term wealth, here's a chart that shows how your initial $1000 investment would grow over time when compounded at 26% annually

Your initial $1000 investment would turn into a whopping $814,228 in 30 years. That's 814x times your investment!

The shape of the curve looks quite familiar because this is a perfectly exponential curve.

In other words, this approach of value investing by buying stocks that are trading for half of their value, is setting you up for exponential returns through your lifetime.

Such returns are considered great by all standards, even for hedge funds and growth investors.

I hope this changed your perspective as it did mine, that value investing doesn't mean compromising on returns.