Think about these closing prices for the Dow Jones Industrial Average (DJINDICES:^DJI):

  • Oct. 9, 2007: 14,164
  • March 5, 2009: 6,594
  • Oct. 5, 2012: 13,610

What we've been through in the last five years may only happen once or twice in a lifetime. It took some of the world's smartest investors by surprise.

Last week, I asked famed value investor Mohnish Pabrai what he learned from the financial crisis and how he responded to the market crash. Here's what he had to say (transcript follows):

Morgan Housel: As you look back at the last four years, now that we've gone through the financial crisis and we've had a recovery, what have you learned the most?

Mohnish Pabrai: Well, I think I probably didn't fully comprehend everything that we were going to go through, so I probably didn't appreciate the huge abyss we were going to fall through and how long the recovery is going to take. So that was certainly an education.

And I would say that I think what I learned is that you have to appreciate the role of probabilities and outliers in outcomes. I think that there are events that will take place from time to time in our lifetimes which will defy what we might think is likely to unfold. So the way the real world unfolds is vastly more messy than the way we might think it unfolds. I think that's just part of the territory.

Morgan Housel: How did you respond in 2008? You had blue chip stocks falling 60%, 70%. How did you respond as an investor?

Mohnish Pabrai: So one of the problems I had at the time is I was caught very flat-footed and very fully invested, so I could clearly see there were lots of opportunities, even 5Xs and 10Xs that we could invest in, but I didn't have dry powder, and I have since worked on that since then to always make sure that I'm never caught in that sort of a situation, so one of the lessons that came out is to make sure you have some ammo to go at things.

I was lucky that one of the stocks I owned actually went up during the financial crisis, and went up quite a bit. This was Fairfax Financial. And so what I did is I sold Fairfax and used that cash to make a number of investments. In fact, the fourth quarter of 2008, especially in the last, I would say, four or five weeks of the year, I probably did more investments than in my career.

So ... I was seeing lots of opportunities in the commodities space, and they all looked very cheap, and I didn't have the time to really thoroughly drill down on each one, and so I took a basket approach. So we bought into a half a dozen commodity businesses, literally with two or three days of analysis, looking at just a few factors that mattered. And I think every single one of them was a winner. We didn't have any losers in that space. In fact, one of them, (unclear), went up 8X.

So the good news was that I was not behaving like a deer looking at headlights. I was very cognizant of the fact that they were tremendous opportunities, and I tried as much as we could to leverage those opportunities. In fact, in 2009, the funds were up like 125% ... and part of that was because we'd made those bets. That was a wonderful time from an investment point of view.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.