Why the Smartest Investors Are Shameless Cloners
There’s something oddly beautiful about being shameless in the world of investing. Mohnish Pabrai — the legendary value investor who built his fortune by cloning the strategies of Warren Buffett and Charlie Munger — often talks about being a “shameless cloner.” But recently, Pabrai shared another equally fascinating concept that adds a new dimension to the art of investing: the Hidden PE of 1.
At first glance, this might sound like a mathematical illusion. After all, how often do you come across a company trading at a Price-to-Earnings ratio (PE) of just 1? Practically never. But that’s exactly where Pabrai’s thinking becomes so interesting. Because the real secret, as he says, isn’t about finding a PE of 1 — it’s about seeing one before anyone else does.
Let’s dive shamelessly into what this really means.
The Myth of the Traditional PE Ratio
In the stock market, the PE ratio is often the first thing investors check when evaluating a company. It’s simple — divide the current share price by the earnings per share (EPS) of the last twelve months. A high PE means the market expects growth; a low PE means it doesn’t.
But if you think about it, the entire logic rests on a paradox. We’re taking a company’s current price, dividing it by its past earnings, and then trying to predict the future returns. There’s nothing forward-looking about this.
As investors, what really matters isn’t the company’s past earnings — it’s the future earnings power. And that’s where the concept of the Hidden PE of 1 takes center stage.
What Is the Hidden PE of 1?
A visible PE of 1 means the share price is roughly equal to the company’s earnings per share — an extremely rare event. Out of 4,000–5,000 companies listed on Indian stock exchanges, you might find fewer than 20 trading at a PE of 1 or below.
But what Pabrai refers to is a “Hidden PE of 1” — companies that appear expensive today but are very likely to grow their earnings so strongly that, a few years down the line, their earnings will effectively “catch up” to today’s stock price.
In other words, the future earnings per share will become equal to or even exceed the current price per share. That’s the true essence of the hidden PE of 1.
A Simple Example: Avenue Supermarts (DMart)
Let’s take an example to make this real.
Avenue Supermarts — the company behind DMart — trades at a PE of over 100. By all conventional wisdom, it looks expensive. But DMart’s profits have been growing at about 25% per year consistently.
If the company earns ₹1 this year, it could earn ₹1.25 next year, ₹1.56 the year after, and nearly ₹2 after a few years. Extrapolate this forward, and you’ll realize that at this growth rate, DMart will effectively hit a PE of 1 in around 21 years.
That’s long, of course. But it illustrates an important point — profit growth is the engine that drives companies toward a hidden PE of 1.
Four Lessons from the Hidden PE of 1
Over time, several learnings emerge when you study companies through this lens. Here are four powerful takeaways:
- Profit Growth Is the Key Variable
To find hidden PE of 1 stocks, focus shamelessly on profit growth.
Companies growing profits above 20% per year — like DMart, Varun Beverages, or IRCTC — are more likely to “grow into” their valuations. Even if their PE looks high today, consistent growth compresses that PE over time.
- Starting Point Matters
A company with a PE of 10 and a 10% growth rate will reach a PE of 1 faster than one with a PE of 100 growing at 20%.
That means — buying cheap still matters. High growth helps, but low starting valuations amplify your upside.
- Avoid Multi-Decade Fantasies
A company that takes 30 years to reach a PE of 1 is practically a lottery ticket. The longer your horizon, the higher the risk of disruption — competition, regulation, technology, or management changes.
Ideally, look for companies that can approach a PE of 1 within 5–6 years. Those are realistic and potentially life-changing opportunities.
- Look Beyond the Giants
You’ll find most “hidden PE of 1” candidates in the mid-cap and small-cap space. Large caps already trade at fair valuations, while smaller businesses have more room for explosive earnings growth.
When India Fails, Look Abroad: The Alibaba Example
Sometimes, the perfect hidden PE of 1 story isn’t local. Take Alibaba Group (NYSE: BABA) in China.
After years of regulatory pressures, geopolitical tension, and slowing sentiment, Alibaba’s stock crashed nearly 80% from its highs. Yet, it remains immensely profitable.
At $65 per share and a net cash position of $70 billion (around $10 per share), the cash-adjusted price comes to $55. Its expected EPS for FY23 was around $7.11, giving a cash-adjusted PE of just 7.7.
Fast forward five years — analysts expect EPS of $14.29, implying a forward PE of 3.8. And if we account for free cash flow (which is about 40% higher than EPS), the real earnings power is closer to $20 per share — making the hidden PE roughly 2.75.
That’s how deep value hides — right in plain sight. And it’s a perfect example of shamelessly cloning Pabrai’s idea.
Shameless Cloning in Action
Pabrai often says, “It’s not imitation, it’s intelligent replication.”
Being shameless in investing doesn’t mean being lazy or thoughtless. It means learning from the best, copying what works, and applying it intelligently.
Warren Buffett once said, “You only have to do a few things right in your life so long as you don’t do too many things wrong.”
The hidden PE of 1 concept aligns perfectly with this. You don’t need 100 ideas — just one or two shamelessly great ones that compound for years.
Where to Find Hidden PE of 1 Stocks
Here’s how a shamelessly smart investor can begin:
- Start with Earnings Growth: Screen for companies growing profits over 20% per annum consistently.
- Check for Pricing Power: Avoid cyclical sectors like metals or sugar, where prices fluctuate due to demand-supply gaps.
- Evaluate Balance Sheet Strength: High debt or poor governance can derail even the best growth stories.
- Look for Turnarounds: Sometimes, fallen angels — once-great companies now facing temporary trouble — can offer hidden PE of 1 potential if leadership and capital improve.
It’s not about perfection; it’s about potential.
The Shameless Investor’s Mindset
Let’s face it — a visible PE of 1 is rare. You’ll probably find one such opportunity once every few years. But when you do, it can be transformational.
A shameless investor keeps an open mind, hunts for undervalued powerhouses, and clones ideas without ego. There’s no pride in originality if it costs you returns.
The market rewards those who see before others do — and the hidden PE of 1 framework gives you exactly that lens.
So, the next time you open a stock screener, don’t just look for low PE stocks. Look shamelessly deeper — for companies whose future earnings potential quietly hints at a PE of 1.
Final Thoughts
Being shameless in investing isn’t a weakness — it’s wisdom.
It’s about learning from giants like Mohnish Pabrai, studying what truly drives long-term returns, and focusing on businesses where the math and the logic meet in beautiful harmony.
The hidden PE of 1 is more than a number — it’s a mindset. It reminds us to value growth, time, and resilience above short-term market noise.
So be shameless. Clone smartly. And let compounding do the talking.