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Why Ask Me? Ask Mohnish...Again

September 12, 2008

Joe Ponzio

3 followers
If you have been following F Wall Street for a while, you'll remember that I went to the Pabrai Funds annual meeting last year. Mohnish Pabrai runs an Early Buffett partnership — no management fee, just a performance fee of 25% of annual profits above 6%. While he's been getting some heat from various value investors and fans/former fans around the web, Pabrai's record of outperformance is still amazing.

Well, it's that time of year again...

PABRAI'S PERFORMANCE RECORD

A July 1, 1999 investment of $100,000 in Pabrai Investment Fund I would have been worth $532,500 as of June 30, 2008 — a 20.4% annualized return. During that time, the Dow gained just 2.5% on average, including reinvested dividends. So, Pabrai's outperformance relative to the index is 17.9% a year — not too shabby for a tech-geek-turned-guru (no offense, Mohnish ☺).

His other two funds have fared well — PIFI 3 beat the Dow by 7.1% on average since February of 2002, and PIFI 4 eeked out a 0.3% outperformance on average since 2003. As one might expect, as his assets grew, his returns began to shrink. Mohnish believes that he can effectively employ up to $1 billion in assets, at which point he'll stop accepting new money.

SIZE MATTERS (Regardless of What You May Have Heard)

It is a lot easier to invest $100,000 or $1 million than $1 billion (or $10 billion, etc). In general, you will find a lot more — and a lot bigger — inefficiencies in small opportunities than in large ones. The institutions will ignore the $100 million buyout, or the $200 million Graham-style net-net which might fit into a piece of a smaller portfolio. Why? I think it is for two main reasons:

They can't put enough money into these deals to make it "worth it" from an impact-to-portfolio standpoint; and/or,

They need to be "right" every month or quarter or they risk losing investors. And in their mind, and in the minds of their investors (and the overwhelming majority of investors), being "right" means (a) break-even or up every day, month, quarter, and/or year and (b) owning the stocks in the news.

I have to admit — if I couldn't see the holdings inside of a portfolio or if I didn't understand the strategy, I'd freak out if my manager told me to remain calm as my portfolio was slashed in half, or if my serious money was in some $80 million market cap company I didn't understand, and that swung 6% a day for no apparent reason.

I once posted (in a comment, I think) that I have a friend that has consistently earned triple-digit returns in futures over the past few years. I'd love to earn those kind of returns. But I don't think I could handle the volatility because I don't understand the system/approach/whatever.

(That's why so many people belong in bonds!)

PABRAI...GOING FORWARD

Pabrai's portfolio is volatile; and, it will always be volatile so long as he sticks to his core strategy. While you or I may not always see the same value he does, that is what makes this game so interesting and potentially lucrative to so many people. (If we all saw the exact same value in the exact same investments, the markets would be efficient.)

So long as he sticks to his approach (and stays away from airlines), I am confident that he'll outperform in the future.

THIS YEAR'S ANNUAL MEETING

On Saturday I'll be attending the Pabrai Funds annual meeting here in Chicago. At this event, everyone has the opportunity to ask a question. So, what would you like me to ask? You can post your question in the comments or e-mail it to me. And if you are planning to attend, let me know and we can meet up.

About the author:

Joe Ponzio
GuruFocus - Stock Picks and Market Insight of Gurus

Rating: 2.6/5 (37 votes)

Comments

DaveinHackensack
DaveinHackensack - 6 years ago
Ask him if he will participate in another Q&A here on GuruFocus.

Ask him also what his biggest mistake has been, in his opinion. Last time someone asked him that here, his answer was that he regretted not putting more money into a 100-bagger Indian tech stock he bought. Maybe he'll have a different answer this time.

Another question for him: see if you can nail him down on the whole "risk versus uncertainty" thing.
viksingh01
Viksingh01 - 6 years ago
can non members attend, can you tell me where it is.
viksingh01
Viksingh01 - 6 years ago
I appreciate this offer,

My questions are as follows

1. What is his opinion of HNR management and their diversification strategy? How does he feel about his investment in ~$70 oil?

2. Has his valuation of CRYP changed, esp. with the new management?

3. For PNCL, how does he get comfortable with his position given the extremely tumultous times in the airline industry?

4. ABXA, what is his gameplan/valuation exit scenario for his investment given the exit of DHL?

5. What does he feel is the competitive strength of health insurers, what are the key factors used in evaluating these companies? Some thoughts on WCG based on the factors he mentions above?

6. Did he make a mistake of investing in DFC not accounting for the extreme outcome of wipeout due to severity of the current downturn?

There are so many, I will post more later.

Thanks for offering this opportunity.

vikram
akhoo12
Akhoo12 - 6 years ago
Did he buy Pinnacle Airlines the way down?
Evan
Evan - 6 years ago
If you can, ask him if he can provide a specific valuation for Sears Holdings, and how he arrived at that figure. Thanks!
equityguy
Equityguy - 6 years ago
Joe, the fact of the matter is that Mr. Pabrai's 2nd and 3rd funds -- both of which have enough of a record to be deemed "long term" -- have had pretty average results for investors. His first fund is the only one with a really impressive record, but it should have an asterisk beside it because up through August of 2002 his first fund employed leverage! I think that is noteworthy. He had a gangbusters start to his first 3 years, plus he was leveraged. That, in my opinion, explains much of the wide variance in his funds returns.

As was mentioned on another message board, if he had started in 2006 or 2007 with the exact same philosophy and with leverage, Mr. Pabrai's funds would likely be out of business today. So in regards to timing, I believe it is quite clear that he got very lucky.

Now, I should say that I respect Mohnish alot and have gleaned lots of valuable insights from him. He is smart, has a good emotional temperament, etc, and it is still too early to declare him a "has been" or failure like so many people love doing.

I think a great question for Mohnish would be whether or not he has had to reevaluate his circle of competence in the past year or two. Another good one is if he now feels it is more important to at least have a feel of where things are headed at a macro level. CCRT, DFC, ATSG, PNCL, LEA, SHLD, etc all got pummeled because of events outside control of the company. Their declines, for the most part, are not a reflection of poor management or execution, but instead of rapidly deteriorating industry results. Problem is, in many cases it looks to be either lethal or crippling. If there is one thing Mohnish could improve upon, it is gauging the huge risks present in the overall economy and ruling out investment candidates that could suffer as a result. Some other investors have done a good job of that, including his idol Mr. Buffett.
viksingh01
Viksingh01 - 6 years ago
equiy Guy said:

"....Another good one is if he now feels it is more important to at least have a feel of where things are headed at a macro level..."

Is it important,it it knowable.I am not sure any one in the right mind can claim any knowledge of that, even Mr.Buffett.

He is very good at understanding managements (e.g. FNM/FRE 15% growth mandate and impact on assett quality) and he also great with identifying risks that are unknown to most.That attitude is proportional to years of experience plus a model of thinking that identifies the risk, Pabrai will get better with experience. Remember this is one of the the worst and chaotic times ever (atleast after 1929). Also Pabrai invest small sums in low cap companies. Some have been impacted adversely, but that is the risk he accepts hoping one of his investment will be a 10 bagger.

I also believe he protects his downside by having assets/cash/contracts that protect value.

Equity Guy also says

"...As was mentioned on another message board, if he had started in 2006 or 2007 with the exact same philosophy and with leverage, Mr. Pabrai's funds would likely be out of business today. So in regards to timing, I believe it is quite clear that he got very lucky...."

I am not sure that is a fair statement, 2002-03 was a downtime, one could find values. 2006-07 was just a high point, if he took leverage then, I will seriosly consider that he has lost his core philosophy.

DaveinHackensack
DaveinHackensack - 6 years ago
"If there is one thing Mohnish could improve upon, it is gauging the huge risks present in the overall economy and ruling out investment candidates that could suffer as a result. Some other investors have done a good job of that, including his idol Mr. Buffett."

His "idol Mr. Buffett" may have been better at gauging the relevant macro risks, but if he was, he doesn't seem to have acted on the knowledge. Buffett rode USG down, and he rode Moody's down -- both stocks that got hammered by the real estate/credit crunch. This hurt Buffett less than it hurt Pabrai because -- despite Buffett and Munger's frequent admonitions about the folly of diversifying -- they were pretty diversified, by position and by sector. As Ken Fisher has pointed out, Buffett and Munger often say one thing and do another. Pabrai on the contrary had a concentrated portfolio of ~10 stocks with maybe two consumer finance companies, two quasi-airlines, etc.
fk
Fk - 6 years ago
Dave,

on Buffett/Munger appearing to be very diversified: I think this just seems that way due to 2 factors:

1. their portfolio being the cummulative result of a very long period where they buy and hold (without selling). If we look at Buffett's meaningful(large enough)annual transactions, he doesn't make many moves, some years none at all .

2. I believe if he could find elephants big enough today, he would have no qualms about being concentrated, just like his early days when stocks like AIG, WPO would make up a HUGE % (> 50% if I recall correctly) of his portfolio.
DaveinHackensack
DaveinHackensack - 6 years ago
It's true that during the Buffett Partnership years that Buffett was occasionally highly concentrated (e.g., putting 40% in Amex).
commodity
Commodity - 6 years ago
Just buy a basket of cheap stocks based on a

simple Ben Graham system .

Look up the Fortune 40.

Nothing to it .

Just do not put it all into one stock.

Nobody can predict the future prices of stocks.

cprause
Cprause - 6 years ago
Ask him if he still believes that the best strategy is to invest in the most distressed business in the most distressed industry... That is the concept he has outlined in his Dhando Investor book. I love the book but as it turns out following that strategy has led to permanent capital impairment for quite a few of his holdings. It may have led other investors in invest in FNM, FRE, LEH, BSC, AIG, CFC, C etc. Have fun at the meeting!
sabonis
Sabonis premium member - 6 years ago
Ask Pabrai what he talked about with WEB...thats about as close to a value investor as he is going to get.

Anybody know who Dante Bichette is?

Bichette was 'roided out while playing baseball in Colorado and the high altitude where everyone's statistics are overblown. Prior to playing in Colorado and after playing in Colorado he was extremely mediocre.

I think Pabrai was the recipient of an extremely favorable investing environment, the equivalent of being on steroids in Denver.

I have the feeling Pabrai will go the way of Dante Bichette.

Just my non-chemically enhanced opinion.

DaveinHackensack
DaveinHackensack - 6 years ago
"Ask him if he still believes that the best strategy is to invest in the most distressed business in the most distressed industry... That is the concept he has outlined in his Dhando Investor book."

Where in the book did he suggest this? I have the book and I don't remember reading that suggestion.

"I think Pabrai was the recipient of an extremely favorable investing environment"

To be fair to Pabrai, the bear market of 2000-2002 was a pretty awful investment environment for most stocks, and he seems to have done well during that period.
Evan
Evan - 6 years ago
"Just buy a basket of cheap stocks based on a

simple Ben Graham system .

Look up the Fortune 40.

Nothing to it .

Just do not put it all into one stock.

Nobody can predict the future prices of stocks."

Commodity,

You remind me of an ancient sage. To be honest with you, I agree with this advice, more or less.
cprause
Cprause - 6 years ago
Chapter 8 in the book is titled "Buy Distressed Businesses in Distressed Industries"
fk
Fk - 6 years ago
commodity, are you referring to this fortune 40 in the cnn/money article?

http://money.cnn.com/2008/06/05/news/companies/Fortune_40.fortune/index.htm

I wonder which of those 40 would actually pass Graham's screen. That guy demanded a really large margin of safety. That's where Buffett/Munger evolved and diverged from that philosophy. They were willing to pay a premium for quality/moat instead of being stuck with nothing to buy because the screen was so stringent.

Anyone else feel free to jump in this discussion, Commodity is not frequently moved to speak or respond to questions :)
Sivaram
Sivaram - 6 years ago
Evan, Commodity IS our sage ;) He is clearly a descendent of the thinking of Confucius. Only he can write short phrases. His enlightenment must have led to the automatic double-spaces as well ;)
DaveinHackensack
DaveinHackensack - 6 years ago
"Chapter 8 in the book is titled "Buy Distressed Businesses in Distressed Industries"

Ah, that six-page chapter. Forgot about it. I don't believe he says to buy the most distressed business in a distressed industry though. I think he's advocating looking at a list of distressed businesses as a starting point for further research.
Evan
Evan - 6 years ago
I haven't read enough Confucius. Its a shame, really. I see he had an influence, though.
cprause
Cprause - 6 years ago
Hi Dave - I read chapter 8 again and I agree with you. He is suggesting to do more research on distressed biz in distressed industries. He is not suggesting to buy distressed businesses without further digging.
vhira
Vhira - 6 years ago
Like I have said before, I think less than 10 yrs. is too short a time period to judge if someone is a guru or not.

V
willtagr
Willtagr - 6 years ago
Cprause said on Sep 13, 2008 at 2:29 PM:

"Ask him if he still believes that the best strategy is to invest in the most distressed business in the most distressed industry... That is the concept he has outlined in his Dhando Investor book. I love the book but as it turns out following that strategy has led to permanent capital impairment for quite a few of his holdings. "

---

He also says to make sure there is limited downside risk.. so yeah.. if you have no business trading stocks and don't do any research then sure u'll lose , but this is nowhere close to what Mohnish Pabrai does.. I read a lot about him and would be perfectly fine with him investing my money for 10 years or more..

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