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Do what Pabrai says, but not always what he does

July 14, 2010
CanadianValue

CanadianValue

210 followers
I like Pabrai. A lot of what he says makes sense. I have to say though that I was shocked at some of his investments in 2008 such as Compucredit and Delta Financial. Not because they were bad investments, but because he was making them at the same time that he was promoting the concept of "heads I win, tails I don't lose much". Both of these were clearly companies that could have the rug pulled out from under them as they relied on other people for funding.

So the tails I don't lose much was not being followed by the teacher. Believe it or not I actually sent him an e-mail through his website about Delta in the summer of 2008 suggesting that he was not appreciating the downside. I wonder if he got the e-mail or remembers it ??

I read an interview with him recently and pulled out some thoughtful and interesting points:

Pabrai: I think the biggest edge would be attitude. So you know, Charlie Munger likes to say that you don't make money when you buy stocks. And you don't make money when you sell stocks. You make money by waiting. And so the biggest, the single biggest advantage a value investor has is not IQ; it's patience and waiting. Waiting for the right pitch and waiting for many years for the right pitch.

Pabrai: Yeah. "All man's miseries stem from his inability to sit in a room alone and do nothing." And all I'd like to do to adapt Pascal is, "All investment managers' miseries stem from the inability to sit alone in a room and do nothing."

Pabrai: You know, actually, I think that the way the investment business is set up, it's actually set up the wrong way. The correct way to set it up is to have gentlemen of leisure, who go about their leisurely tasks, and when the world is severely fearful is when they put their leisurely task aside and go to work. That would be the ideal way to set up the investment business.

Pabrai: That's right. I mean, I think the low risk, high uncertainty is really something I borrowed from entrepreneurs, and you know, the Patels in India or the Richard Bransons of the world. Basically if you study entrepreneurs, there is a misnomer: People think that entrepreneurs take risk, and they get rewarded because they take risk. In reality entrepreneurs do everything they can to minimize risk. They are not interested in taking risk. They want free lunches and they go after free lunches. And so if you study any number of entrepreneurs, from Ray Kroc to, you know, Herb Schultz at Starbucks ( SBUX - news - people ) and to even Buffett and Munger and so on, what you'll find is that they have repeatedly made bets which are low-risk bets, which have high-return possibilities. So they're not going high risk, high return. They're going low risk, high return.

And even with Bill Gates, for example. The total amount of capital that ever went into Microsoft ( MSFT - news - people ) was less than $50,000, between the time it started and today. That's the total amount of capital that went into the company. So Microsoft you cannot say was a high-risk venture because there was no capital deployed. But it had high uncertainty. Bill Gates could have gone bankrupt. Or Bill Gates could have ended up the wealthiest person on the Forbes 400. And he ended up at the extreme end of the bell curve, and that's fine. But he did not take risk to get there. He was comfortable with uncertainty. So entrepreneurs are great at dealing with uncertainty and also very good at minimizing risk. That's the classic great entrepreneur

Pabrai: Well, the insight is the same, in the sense that I think that, you know, Warren says that I'm a better investor because I'm a businessman, and I'm a better businessman because I'm an investor. So the thing is that my experiences as a businessman have very direct, long-term positive impacts on me as an investor, because when I'm looking at an investment, I now look at it like the way I looked at my first business, which is, the first thing I'm looking at is, how can I lose money on this? And can I absolutely minimize my downside?

The upsides will take care of themselves. It's the downsides that one needs to worry about, which is why even the checklist becomes important. But so the important thing that value investors focus on is downside protection. And that's exactly what entrepreneurs focus on--what is my downside? So that is the, I would say, the crossover between entrepreneurship in investing, and value investing especially, is protecting your downside.

Pabrai: Well Delta Financial was a full loss for the firm, for the fund. We lost 100% of our investment. It was a company that went bankrupt. And we've learned a lot of lessons from Delta. And one of the lessons was that Delta was, in many ways, a very highly levered company and they were very dependent on a functioning securitization market. And when that market shut down, they were pretty much out of business. And they were caught flat-footed. And so there's a number of lessons I've obviously learned from Delta.

It's easier to learn the lessons when you don't take the hits in your own portfolio. But when you take the hits in your own portfolio, those lessons stay with you for a long time."

Here is the link to the full article: http://www.forbes.com/2010/04/09/pabrai-leisure-china-intelligent-investing-technology.html

I think if you follow a couple of his key points of minimizing the downside and letting the upside take care of itself and low risk, high uncertainty you will greatly improve as an investor. Easier said than done of course.

About the author:

CanadianValue
http://valueinvestorcanada.blogspot.com/

Rating: 4.6/5 (34 votes)

Comments

halis
Halis - 4 years ago
It's weird. I have read Pabrai's books and have read many of the guy's book recommendations as well. I think he's extremely intelligent and I'm a big fan.

The thing is though, I rarely seem to invest in anything that he does. Looking at his current portfolio, the only things he owns that I have ever owned are Goldman Sachs and Wells Fargo. I thought I might have owned some Potash, but I looked and I actually thought NYSE:MOS was better and that's what I previously owned.

Every investor, over the long-term, is going to own something that defaults at some point. How much of his portfolio was it though?

I am very weary of leverage. In fact, even though I think Goldman Sachs is a great company, it's their leverage that made me sell out eventually. Just look at their cash flow over the past 10 years. If you can explain that and have no doubts whatsoever about what they are doing, then buy them. I just determined that I really didn't understand them very well.
DaveinHackensack
DaveinHackensack - 4 years ago
Pabrai is a smooth talker and savvy marketer. He talks about Buffett and Munger like Buffett used to talk about Ben Graham. Except that Buffett studied under and worked for Graham while Pabrai paid to go to lunch with Buffett once.
BuffettMungerII
BuffettMungerII - 4 years ago
I once thought highly of Pabrai, that is, until I met him.

I saw him at the Wesco Annual Meeting this year. He's hard not to notice, being a tall, large man. Unlike Buffett though, it turns out he's quite a flashy dresser, wearing a gray pinstripe suit with a bright green tie. It certainly stood out amidst the sea of blazers and khakis. Funny, I recall thinking, this person certainly doesn't appear modest or humble.

What really caught my eye, however, was not his clothing. In fact, I noticed Pabrai because he was hovering around the Munger family, trying to get a word in edgewise with Charlie's children (who I know from university).

With my curiosity sufficiently aroused, I decided to go over and introduce myself to Pabrai, with the intention of striking a friendly acquaintance. Given his imitation of all things Buffett, I was expecting warmth and humor. To my surprise, my initial impression of him was: fidgety, cool, and a bit dismissive.

Far from warm and jovial, his behavior left me feeling uncomfortable and brushed off, another divergence between Pabrai and the man he professes to idolize. When I was introducing myself, his eyes darted all over the room. There wasn't the slightest hint of a smile on his mouth. That earnest, eager-to-please persona of Pabrai you see in interviews was replaced by a sour, uninviting presence. I once had the enormous pleasure of meeting Buffett and subsequently corresponding with him. Buffett is as charming in private as he is in public. With Pabrai however, there seem to be two sides to his character, the side that swoons to the media, and the side that is more cynical and egotistical. (Look at the video of him answering questions from Columbia MBAs and you'll see what I mean)

Despite all these worrying signs, I decided to give Pabrai the benefit of the doubt by writing him an email expressing my interest in meeting him to learn more about his funds. I've met many highly regarded value investors in this manner including two supposed CIO successors to Buffett. It's a sign of great character if they take the time to reply themselves, even if the answer is no. Well, no surprise at this point, Pabrai has his assistant Nickii reply to my email with a supercilious response about how a "meeting doesn't fit into his schedule."

With that, I had enough data points to connect the dots that Pabrai isn't what he makes himself out to be. Pabrai may be smart and technically competent, but his flashy style, public vs. private persona, and egotistical manner suggest he is far from becoming the next Buffett. As Buffett has said, there are three types of people: the innovators, imitators, and the idiots. Pabrai is certainly the second, and only time will tell if he's also the third (though his 2008 performance may give you a hint).

---

Mr. Pabrai, if you're reading this, I'd like you to know that no matter how much you publicly profess to admire Buffett and put on a good-guy routine for the cameras, your actions reveal the man. Incidentally, you also passed on a chance to develop a relationship with someone who has a strong relationship with a major university endowment manager and a family office with $10 billion AUM. I'm no longer interested in meeting, though I am happy to provide a character reference to anyone who asks.

PHILCIR
PHILCIR - 4 years ago
I had this guy pegged years ago ---- he blabs and blabs. I believe he is from the Tilson school of investing. I don't think he knows what he is doing. He should have stayed in the dry cleaning biz because before this market is finished destroying wealth, Pab will be cleaned out.

Great comments buffettmunger above - enjoyed the read.
mevsemt
Mevsemt - 4 years ago
So this is what's become of the gurufocus message boards?

Call me crazy, but the ONLY thing that should matter about Mohnish Pabrai is the IRR of his fund, his stock picks, and his thoughts on investing.

However, if you're the kind of person that likes reading other people's gossip and slander then I have a good website for you, http://www.tmz.com/.

But then again what do I know... (there were a lot of 5 star ratings on the previous posts)

Frank Lind
Frank Lind - 4 years ago
This is not gossip that BuffetMungerII is providing. It's an honest insight into someone's character.

Combine this with the evidence produced by Mr Hackensack over at his blog - regarding Pabrai's inconsistent methodology - and it points to a good saleman.

You want to know the person managing your money has good character. It's vital.

mevsemt
Mevsemt - 4 years ago
That's an interesting take Frank Lind... and perhaps you're right about the "honest insight" that BuffettMungerII is providing. However, IMHO it felt to me like several of the posters have an ax to grind...

Anyway, Pabrai's "inconsistent methodology" IS a valuable and appropriate thing to discuss on a value investing website - maybe there's something to learn from the evolution of his stock picking and portfolio management strategy (IMO there was nothing wrong with the first couple of posts in this thread).

And I agree that you want the person managing your money to have "good" chararcter. BUT in the context of money management I think you can define "good" as intelligent, honest, fair, and aligned - most other character flaws are largely irrelevant. Afterall you're looking for a money manager, not a friend (my bank doesn't care if my money is compounded by an a$$, does yours?)

Anyway, I've read that Munger is a "prick," Lampert is "aloof," and Berkowitz is a "snob" in forums similar to this... Now I've read that Pabrai is "egotistical" and an "imitator." And IMHO these posts tell me nothing about the investor but quite a bit about the author...

Thoughts?

DaveinHackensack
DaveinHackensack - 4 years ago
Combine this with the evidence produced by Mr Hackensack over at his blog - regarding Pabrai's inconsistent methodology - and it points to a good saleman.

Actually, a good salesman would have been more courteous and respectful, and perhaps earned an intro to BuffettMungerII's institutional investor friends. I may have to rethink my characterization of Pabrai as a super salesman.

halis
Halis - 4 years ago
Say what you want about the guy, he's still slaughtering the market.







jffunds
Jffunds - 4 years ago
I have had good experiences with Pabrai, and I am not an investor with him. I called his office, he answered the phone himself and was pleasant. I sent him something in the mail, he called back to invite me to dinner. For what it's worth, the last time I saw him at Wesco he was wearing a wrinkled polo shirt.

Alas, all that principally matters in the context of this website is his investment performance.
augustabound
Augustabound - 4 years ago




Anyway, I've read that Munger is a "prick," Lampert is "aloof," and Berkowitz is a "snob" in forums similar to this... Now I've read that Pabrai is "egotistical" and an "imitator." And IMHO these posts tell me nothing about the investor but quite a bit about the author..
This may or may not be relevant, but those three are fairly independent thinkers and Pabrai keeps chanting, "Shameless Buffett clone, shameless Buffett clone.........."

It seems that those who condemn him may put more faith in the character or perceived character of those who run their money.
BuffettMungerII
BuffettMungerII - 4 years ago
I said what I had to say (based 100% on my own personal experience with Pabrai), and I wasn't going to wade further into this debate. But I'm going to respond to "jffunds" because I'm a bit annoyed by one of his contradictions, which might cause readers to question my credibility.

Jffunds, it's mildy surprising to me that you would go on record (albeit in an anonymous forum) claiming something untrue. It calls into question the veracity of your other assertions. "
For what it's worth, the last time I saw him at Wesco he was wearing a wrinkled polo shirt." Were you actually at the 2010 Wesco meeting in Pasadena? If so, could you answer the following questions? If you were facing the stage, which side of the room was Pabrai sitting in (both front/back, and left/right)? Which "famous" investor asked the first question during Q&A?



---

Since the issue has been raised, I have my own two cents. I disagree that all that matters is IRR and performance. In the narrow viewpoint of this particular website, perhaps that's true. We're all trying to learn how to be better investors, and I'm actually grateful that Pabrai is honest and forthright about his mistakes. I give him a lot of credit for that. However, if you believe what Munger and Buffett said is true that "character determines fate", I was pointing out what I saw were inconsistencies in how Pabrai presents himself in public and in private. These inconsistencies raise issues of temperament and character that are worth examining. The endowment managers that I know have dinged investment managers for MUCH smaller character infractions. And by the way, regular media appearances is a big sin.
The simple fact is great investors don't spend their early careers in front of the camera. Anything that takes them away from investing lowers them on the mastery curve.
augustabound
Augustabound - 4 years ago
FWIW, he didn't say Wesco 2010, he just said Wesco. Could have been 10 years ago. :)
jffunds
Jffunds - 4 years ago
I am sorry BuffettMungerII if you took my remarks as an attack on your credibility. What I said about my experience with Pabrai is true. I last saw him at the '03 or '04 Wesco. He was wearing a green polo. I remember this because his outfit was abnormally casual relative to the others in the room.

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