To read more about what transpired during the lunch between the two Investment Gurus, users are encouraged to read this article by Tess Vigeland with www.publicradio.org.
As a good old book says, "For Where Your Treasure Is, There Your Heart Will Be Also”, Pabrai follows the same attitude towards the wealth as Warren Buffett, we will then have a true believer in Warren Buffett. I do not second guess his motives of spending so much money on a lunch on a guy he truly believed in and felt very indebted to. I dismiss the idea of that is a simple marketing event for his fund.
Talking about investing, after the famous lunch in 2008, Pabrai’s hedge fund’s performance actually turned south. For the year 2008, his portfolio was down 60%. 2008 was a rough year for everybody. But if you are managing money for a couple of hundred families and you are down 60%, you have a lot more questions to answer than just your other better half. I believe Pabrai had many soul-searching nights.
The only visible sign of change in strategy, is that he would from now on instead of owning 10 stocks (10% each so called “10x10”), he would, according to an article entitled “ Lessons to be learnt from losses” by Whitney Tilson in FT.com:
One star money manager who has decided an investment strategy change is in order is Mohnish Pabrai of Pabrai Investment Funds. Having endured a humbling 2008 after several years of outsized returns, Mr Pabrai concluded that his "10x10" approach to position sizes - targeting 10 per cent positions for all his most compelling ideas - needed refining.
His new guidelines for diversification set the target position size at 5 per cent, for which "a double has a meaningful impact on the portfolio and a 50 per cent drop means a 2.5 per cent hit - both of which are acceptable", he says.
Position sizes up to 10 per cent will occur only on an exceptional basis, he says, "if seven moons line up". All other positions will be closer to 2 per cent, especially those in highly correlated stocks - such as those of a zinc producer and iron ore miner - or those with highly asymmetric risk/reward profiles.
In fact, Mr Pabrai says he's finding many opportunities today that fit his 2 per cent position.
He is pragmatic in explaining his strategy change. "One needs to be a learning machine and be willing to give up some of one's best-loved ideas when the evidence suggests they are flawed."
In 2Q09, Pabrai reported a holding of 16 domestic stocks distributed $235 million. Not included is his foreign stock holdings and cash. So as far as number of stocks in concerned, he delivered or was close to delivering his words.
On performance: even though Pabrai has not reported his YTD performance, one can get a glimpse of his performance based on information available. At the end of June, he was reported to have returned more than 50% YTD by that time, according to the Fox Business News interview.
After that, GuruFocus keeps track of the portfolio performance since the Quarter’s beginning (July 1, 2009 in this case). Since then, his portfolio returned about 41% vs. S&P 500’s 15%. Combined with the performance since the beginning to then end of June, he has more than doubled his money YTD.
What portfolio can be so powerful that doubles since beginning of the year? Here are his top holdings:
No. 1: Ternium S.A. (TX), Weightings: 13.13% - 1,783,644 Shares
Ternium is the leading producer of flat and long steel products of Latin America and consolidates the operations of the steel companies Hylsa in Mexico Siderar in Argentina and Sidor in Venezuela. Ternium S.a. has a market cap of $5.56 billion; its shares were traded at around $27.71 with and P/S ratio of 0.6.
Pabrai held the stock since 2Q07, when he had 1.64 million shares. He held 1.78 million shares as of 2Q09, hardly changed during the past two years. Pabrai is known a stock for a long time. I wonder why he learned that from.
No. 2: Harvest Natural Resources Inc. (HNR), Weightings: 10.69% - 5,684,201 Shares
Harvest Natural Resources Inc. is an independent oil and gas exploration and development company with principal operations in Venezuela and Russia. Harvest Natural Resources Inc. has a market cap of $180.1 million; its shares were traded at around $5.43 with and P/S ratio of 16.
Pabrai held 1.0 million shares in 4Q04 and over time he accumulated more shares. By 3Q07, he reached a peak holding of 5.7 million shares, a position he maintained virtually unchanged since then.
GuruFocus Insider Data shares Pabrai has been selling some small positions (3 to 5000 shares). I do not consider that significant. Maybe some separately managed account(s)?
No. 3: Teck Cominco Ltd. (TCK), Weightings: 7.96% - 1,006,501 Shares
Teck Resources Limited formerly Teck Cominco Limited is a diversified resource company committed to responsible mining and mineral development with major business units focused on copper metallurgical coal zinc gold and energy. It is a world leader in the production of copper metallurgical coal and zinc a significant producer of gold molybdenum and specialty metals with interests in several oil sands development assets. Headquartered in Vancouver Canada the company has expertise across the full range of activities related to mining including exploration development smelting refining safety environmental protection product stewardship recycling and research. The Company is actively exploring in countries throughout the Americas Asia Pacific Europe and Africa. It also sells electrical power that is surplus to its requirements at the Trail metallurgical operations. Teck Cominco Ltd. has a market cap of $15.93 billion; its shares were traded at around $27.5 with a P/E ratio of 13.1 and P/S ratio of 2.5.
Pabrai bought 977,301 shares in 4Q08 and in 2Q09 he had 1,006,501 shares (I have to include all the significant digits to show the differences).
No. 4: Berkshire Hathaway Inc. (BRK-B), Weightings: 7.94% - 6,432 Shares
It is only fair for Pabrai to own some of Buffett’s company’s shares.
But he has been trading in and out of Berkshire Hathaway. In 1Q06, he owned 3,012 shares, and sold down to 95 shares by 3Q06. In 3Q07, he was back to 17,520 shares again, and sold down to 288 shares by 1Q08. He built a position of 5,179 shares by 2Q08, only to clean out all by 254 shares by 4Q08. But recently, he increased to 5,888 shares in 1Q09 and 6,432 shares in 2Q09.
Pabrai uses Berkshire shares as a kind of money market account. I am not sure if Buffett would approve his behavior. Buffett likes his shareholders hold shares forever so he can see the same group of investors each year in the annual shareholders’ meeting.
No. 5: Fairfax Financial Holdings Ltd. (FFH), Weightings: 7.32% - 68,812 Shares
Fairfax Financial Holdings Limited is founded and headed by another Investment Guru, Prem Watsa. It is a financial services holding company which through its subsidiaries is engaged in property casualty and life insurance and reinsurance investment management and insurance claims management. Fairfax Financial Holdings Ltd. has a market cap of $6.22 billion; its shares were traded at around $369.94 with a P/E ratio of 6.3 and P/S ratio of 0.8. The dividend yield of Fairfax Financial Holdings Ltd. stocks is 2.2%.
Pabrai owned FFH since 3Q05 when he held 179,716 shares. He increased shares through 3Q07 and since then he has been selling shares. However, he was seen buying more shares in 2Q09, increasing from 46K shares to 69K shares.
No. 6: Brookfield Properties Corp. (BPO), Weightings: 7.22% - 2,124,668 Shares
Brookfield Properties Corporation is focused on the ownership management and development of premier office properties located in the downtown core of select markets. Brookfield Properties Corp. has a market cap of $5.84 billion; its shares were traded at around $11.67 with a P/E ratio of 11.8 and P/S ratio of 2. The dividend yield of Brookfield Properties Corp. stocks is 4.8%. Brookfield Properties Corp. had an annual average earning growth of 12.7% over the past 5 years.
Pabrai bought 2.1 million shares in 2Q09. BPO is a subsidiary of Brookfield Asset Management (BAM), headed by Barry Blattman. BAM manages about $80 billion in real estate, renewable power, infrastructure, equity and fix income. They do not emphasize on stock investing so GuruFocus does not track Barry Blattman as a Guru. But they do a good job with their money and those of their clients, if you are into hard assets such as real estate, look into them.
7. Leucadia National Corp. (LUK) Weighting: 7.14%, - 793,972 shares
Leucadia National Corp. is headed by Investment Guru Ian Cumming. It is a diversified financial services holding company principally engaged in personal and commercial lines of property and casualty insurance life insurance banking and lending and manufacturing. The Company concentrates on return on investment and cash flow to build long-term shareholder value rather than emphasizing volume or market share. Additionally the Company continuously evaluates the retention and disposition of its existing operations and investigates possible acquisitions of new businesses in order to maximize shareholder value. Leucadia National Corp. has a market cap of $6.28 billion; its shares were traded at around $25.76 with and P/S ratio of 5.8.
Pabrai bought 774,672 shares in 4Q08 and in 2Q09 he owned 793,972 shares.
Pabrai has increased his number of stocks held. Also, four of the top seven holdings are companies managed by star asset managers (Buffett, Pabrai, and Cumming, etc.). It looks like Pabrai likes to place his bets with people are good with their money, management of good track record.
In an interview with then Columbia MBA student David Kessler, owner of website www.grahamanddoddsville.net, Pabrai discussed this topic:
David Kessler: What importance do you place on assessing management when you make an investment?
Pabrai: … One thing I would say is that if you take a look at three classic value managers: Longleaf Partners, Third Avenue, and Fairholme – all three are value managers, but all three have very different styles. Marty Whitman of Third Avenue cares very much about hard assets and he doesn’t care as much about things like franchise value, or moats or even management. He cares the most about hard assets. If you look at someone like Longleaf, they care a lot about the franchise. They focus on the enduring moat, franchise, etc. One time they mentioned that they thought that Coke bottlers were a great business, and they went looking around the world making a list of every Coke bottler on the planet, trying to see which ones they could invest in at decent prices. In general, they focus on the business and the valuation, but not as much on the management. Their focus is more on moats and franchise value, which is what you will see if you look at Longleaf’s portfolio. Then, if you look at someone like Fairholme, they are all about jockey bets. Most of their portfolio is invested in people who are great jockeys. They have large positions in Leucadia, Berkshire Hathaway, and Canadian Natural Resources. If you start to look at why they bought these businesses,it is all about the jockey.
When I look at Pabrai Funds, I think of it as a blend of the three, because I have made many investments which are very much Third Avenue-type bets – pure hard-asset plays. I have also made investments where it is about the franchise value, moats, brands and so on – a Longleaf play. I have also made several jockey bets, like Fairholme. I would say that over the past 12 months, I have learned to appreciate and spend more time analyzing the jockeys and put more weight on it.
Very well said, Mr. Pabrai!
Also, Congratulation on the strong showing in the portfolio performance!
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