Investing Thoughts From Monish Pabrai
On Buffett’s Different Investing Approaches
There are many different approaches that Buffett has applied over his long career. Even today, Buffett’s investing approach when investing for his own account differs significantly from his approach when allocating capital for Berkshire . Because of taxes on gains and the huge amounts of cash that has to be invested the best approach for Berkshire is to buy and hold stocks for a long long time.
Since Berkshire has to buy and hold forever (or for very long periods) it needs:
1) To find investments with extremely durable moats
2) To find investments that can redeploy earnings at high rates of return
3) An attractive initial entry price
If you hold a stock for an extremely long period of time your total return even if purchased at a discount is going to be close to the company’s return on equity. The Berkshire insurance float helps to juice that return, but it is basically impossible for Buffett to find investments at the size he needs that can compound at faster than 12% to 15% per year.
On the other hand, Buffett the individual investor can buy a cheap stock and sell it at full price and pay mostly 15% long term gains. He gets taxed once. It is very efficient. Thus Buffett bought REITs when they got cheap – and then sold them all. He bought Korean stocks when they got really cheap during the Asian crisis.
On His Own Valuation Methods
In some cases you can only count on liquidation value. In other cases there is enough of a moat to focus on future cash flows. There is no need for Excel. If a business has zero growth and consistent stable cash flow, that business is worth 10x FCF plus any excess capital. I then divide by two and see if it’s available at half off. If there is growth, depending on how much and how consistent, I’d be willing to value it at 12-15x plus excess capital.
It should be obvious if something is a bargain or not within a few minutes without Excel.
On His Investment in Frontline
That was a situation where the business was trading at ¼ of liquidation value due to severe distress in the entire oil shipping industry. These ships were regularly bought and sold nearly every week and it would be relatively easy to liquidate the business – one or more ships at a time.
Balance sheet was very solid. Frontline was losing money but had plenty of liquidity and could raise nearly unlimited liquidity to cover any cash crunch by selling one or more ships.
So, there was virtually no downside – virtually non-existent risk. The uncertainty was when they’d return to profitability. Whether they would return to profitability was really not an issue due to the limited number of oil tankers globally and the predictable oil demand growth from ermerging economies.
So low risk, but high uncertainty. The stock went from $15 to $3 when the industry got distressed. Liquidation value was $12-14/share.
On His Two Kinds of Investments
I think of two kinds of investments – placeholders and normal. Placeholders, like Berkshire Hathaway, are stocks with ultra-low downside and decent upside, but not at a 50% discount to intrinsic value. I’ll part money in these till a real/normal investment opportunity shows up. The normal investment opportunities are those that are available at 50% off of intrinsic value.