To Index or Not to Index—That Is the Question

Mohnish Pabrai concedes that the returns from investing in stock indexes will be better than the returns yielded by most active managers. In the aggregate, active managers are the market, and hence after incorporating frictional costs, active managers in the total will always underperform compared to the market.

However, he asserts that Dhandho investors will always outshine the market, and thus he suggests that individual investors, who don't have much time and inclination to invest in a Dhandho manner, should find such a manager.

For those who are interested in finding the investments themselves, he proposes ten places where "50 cent dollars" can be found, which means investments worth one dollar but are selling in the market for 50 cents:

• www.magicformulainvesting.com: Stocks are ranked by P/E ratio. Pabrai recommends this as an incredible screening process.
• The Value Investors Club website by Joel Greenblatt: It contains the stock ideas of other value investors.
• Subscribe to Value Line's bottom list: Stocks that have lost the most value in the last week, stocks with the lowest P/E ratio, etc.
• Look at the 52-week low lists on the NYSE daily
• Subscribe to Outstanding Investor Digest and Value Investor Insight: Both comprise interviews with great value investors who offer up some ideas every once in a while.
• Portfolio Reports: This edition lists the recent buying activity of some of North America's top money managers.
• Guru Focus: A site devoted to tracking the buying and selling of some of the world's top value investors.
• Super Investor Insight: Tracks the 13-F filings (a quarterly report that must be submitted by institutional investment managers to the SEC to disclose their investments) of the super investors.
• Major business publications like Wall Street Journal, BusinessWeek, Fortune, Forbes, etc.
• Attend the biannual Value Investing Congress
• By using the above resources, one is bound to find good ideas. The author asserts that these resources are invaluable, considering the value investor does not need many ideas to succeed.