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Mohnish Pabrai Top Holdings: Ternium S.A., Harvest Natural Resources, : Potash Corp. of Saskatchewan Inc., Teck Cominco, Fairfax Financial Holdings, Brookfield Properties

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(GuruFocus, Update on November 29, 2009) Investment Guru Mohnish Pabrai lives and breathes Buffettology. He has a religious devotion towards the way Warren Buffett manages his money. To pay his tribute back to the guy whose intellectual property inspired and enabled him to allocate money, he bid over $600K for a lunch with Warren Buffett. During which according to Pabrai himself, they talked more about how to live one’s life than about how to invest. Like Buffett, Mohnish also set up his own philanthropy foundation. One of the topics they dwelled on during the lunch is on inheritance and philanthropy. Mohnish brought his wife and two kids along, and Buffett’s advice is to “ leave enough money for your kids, for them to do anything they want, but not enough for them to do nothing.”

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 3Q09, Pabrai reported a holding of 17 domestic stocks distributed among $333 million. Not included in the portfolio is his foreign stock holdings and cash.

On performance: Mohnish delivered superb returns to his investors this year. Through September 30, 2009, all three funds were up more than 110% and beating the market indices by a large margin.

What portfolio can be so powerful that doubles since beginning of the year? Here are his top holdings as of Septemb 30, 2009:

No. 1: Ternium S.A. (TX), Weightings: 9.28% - 1,126,331 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 $6.46 billion; its shares were traded at around $32.2 with and P/S ratio of 0.76.

Pabrai held the stock since 2Q07, when he had 1.64 million shares. He reduced his holdings from 1.78 million shares to 1.13 million shares in 3Q09.

No. 2: Potash Corp. of Saskatchewan Inc. (POT), Weightings: 9.06% - 324,058 Shares

Potash Corporation of Saskatchewan Inc. is the world's largest potash company, the third largest phoshate producer and the second largest nitrogen producer in the world. Potash Corp. Of Saskatchewan Inc. has a market cap of $33.02 billion; its shares were traded at around $111.64 with a P/E ratio of 22.24 and P/S ratio of 3.49. The dividend yield of Potash Corp. Of Saskatchewan Inc. stocks is 0.36%. Potash Corp. Of Saskatchewan Inc. had an annual average earning growth of 12.6% over the past 10 years.

Pabrai increased his shares from 154K shares to 324K shares.

No. 3: Harvest Natural Resources Inc. (HNR), Weightings: 8.98% - 5,655,201 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 $189.73 million; its shares were traded at around $5.72 with and P/S ratio of 16.91.

Pabrai held his 5.7 million shares of HNR steady during the quarter.

No. 4: Teck Resources Ltd. (TCK), Weightings: 8.59% - 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. 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 $19.91 billion; its shares were traded at around $34.38 with a P/E ratio of 23.07 and P/S ratio of 3.06.

Pabrai held his one million shares of TCk steady during the quarter.

No. 5: Brookfield Properties Corp. (BPO), Weightings: 8.23% - 2,360,767 Shares


Brookfield Properties Corporation is focused on the ownership, management and development of premier office properties located in the downtown core of select North American markets, including: New York, Boston, Toronto, Calgary, Denver,and Minneapolis. Brookfield operates real estate service businesses and develops master planned communities. Brookfield Properties Corp. has a market cap of $5.51 billion; its shares were traded at around $11.01 with a P/E ratio of 11.59 and P/S ratio of 1.98. The dividend yield of Brookfield Properties Corp. stocks is 5.09%. Brookfield Properties Corp. had an annual average earning growth of 12.7% over the past 5 years.

Pabrai increased his holding in BPO from 2.1 million shares to 2.36 million shares.

No. 6: Fairfax Financial Holdings Ltd. (FFH), Weightings: 7.9% - 68,812 Shares

Fairfax Financial Holdings Limited 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 $6.83 billion; its shares were traded at around $346.69 with a P/E ratio of 8.93 and P/S ratio of 0.86. The dividend yield of Fairfax Financial Holdings Ltd. stocks is 2.31%.

Pabrai kept his 68,812 shares of FFH for the third quarter of 2009.

Conclusion

Pabrai sticks to same investment thesis with his holdings and has achieve superb return so far this year.

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Rating: 3.4/5 (17 votes)

Comments

hschacht
Hschacht - 4 years ago
Ternium... 300% ytd. It has been a fun ride.
puff6962
Puff6962 - 4 years ago
These are not Buffett stocks.
hschacht
Hschacht - 4 years ago
Meaning they go up?
kbelmore1
Kbelmore1 - 4 years ago
Wow it's surprising that Mr. Pabrai's fund did not implode after the 60% drop in 2008. Sure he made up for things in '09, but let's take a look. A 100 grand down 60% -is of course down to 40 grand. Now tack on 110% in "09 and you get back up to $84,000. Not terrible but still down 16%. And that's IF you had the courage to stay with this money manager while he took you past the gates of hell! Still he's down 16%. A lot of others are down more than that, and you can argue that Mr. Pabrai has learned the lesson that position size matters the most in a big bad bear. Yeah I guess if I were with him I'd be glad I stayed.

Kenboe
DaveinHackensack
DaveinHackensack - 4 years ago
Mr. Pabrai has learned the lesson that position size matters the most in a big bad bear.No it doesn't, and that Pabrai took this "lesson" from the events of last year is another reason why he shouldn't be a guru. Except for Treasuries, pretty much everything got hammered* last year. Diversification didn't protect you from that.

*A lot of stuff that got hammered has bounced back, but exceptions include those companies that went bust, such as Pabrai's DFC. A lesson Pabrai should have learned from last year is about the importance of having a solid balance sheet and not being dependent on continuous external financing.

Moathunter
Moathunter - 4 years ago
Pabrai says about his change from a 10x10 portfolio- "give up some of one's best-loved ideas when the evidence suggests they are flawed".

... That is, flawed for his unique situation only. Pabrai appeared to have simultaneous cash redemptions whilst holding big stakes in temporarily illiquid holdings, resulting in his shift to standard mutual 'value' fund concentrations.

But if you're managing your own and family's money that you know won't have a cash call, stick with a 10x10% or better yet 7x14% portfolio if valuing the holdings yourself and not coat-tail investing. Risk of capital loss is reduced with a<10 portfolio than with a 20> stock fund, it requires less research work and the returns are better.
DaveinHackensack
DaveinHackensack - 4 years ago
Moathunter,

I'm with you on the ~7 position portfolio if you're doing your own homework and running your own money. But even if you were running money that could be immediately redeemed, having a more diversified stock portfolio wouldn't have protected you against being forced to take losses to make redemptions last year. The only things that would have given you some protection against that would have been if you were hedged or had significant cash or Treasury holdings to draw on.
Moathunter
Moathunter - 4 years ago


True, DaveinHackensack.

Mind you, Klarman advises always holding say 1/7th of a 7-stock portfolio always in cash, to be able to hit the fat pitch of an occcasional cheap stock. Holding 1/7th in cash lowers the opportunity cost (next best alternative) of a dirt cheap stock becoming available. So only fleetingly would the portfolio be fully invested in 7 stocks.

And that 1/7th in cash would meet redemptions and avoid the forced selling turning quotational losses into actual losses.

That's a really counterintuitive thing- by not being fully invested (avoiding 'rhinophobia'), you increase investment returns, in part due to being able to meet redemptions without selling stock but instead returning some of that 1/7th or 14% of cash holding... and sell a stock (to return to 1/7th in cash) at the best price.

Additionally, you avoid Soro's reflexivity effect where a cash call lowers portfolio return that leads to more cash calls that lead to yet further falls in portfolio value leading to more cash calls....
Evan
Evan - 4 years ago
I fail to see how "learning a lesson" is enough to eliminate someone's guru status. Buffett has been constantly learning throughout his career. What matters is long term track-record. Pabrai's is one of the best.
jeffreyb
Jeffreyb - 4 years ago
Pabrai, when all is said and done, now has a 10 year record that, when compared to mutual funds, would be in the top 1% of all mutual funds in performance. That includes his 60% 2008 loss ... so that says it all for his longer term investing.
Moathunter
Moathunter - 4 years ago
Jeffreyb- Yes, Pabrai's performance would place him in the top 1% of mutual funds... and also in the top 0.5% for year-to-year volatility too.

When you have such deviation in annual performance, a client's next question should be "can I be certain I won't sell out of this fund at a trough that might be -30% or more, in the future?".

After all, a fund could average 20% p.a. over a decade, but if you sell in a -30% trough, then you'd be lucky to achieve a 0% p.a. return.

And if you can be certain your temperament will stomach such volatility, then YOU should be managing your own capital for superior 30%+ p.a. returns and with volatility that you have knowledge and control over, instead of entrusting with someone who might commit suicide/ go into exile/ take a Nick Leeson-type bet to recover the losses.

All 3 scenarios are total blow ups with the client returning back to zero.

I'd check out the risk before drooling over the returns- volatilty is a risk of permanent capital loss if the client sells at the point of greatest stress.
DaveinHackensack
DaveinHackensack - 4 years ago
Moathunter,

Mind you, Klarman advises always holding say 1/7th of a 7-stock portfolio always in cash, to be able to hit the fat pitch of an occcasional cheap stock.

That makes a lot of sense, and is similar to Greenblatt's point that he'd feel comfortable with 80% of his portfolio in 5-8 great businesses (i.e., presumably, the other 20% would be in cash). I have become a lot more comfortable holding cash recently.

I also like the idea of having some short positions. If you are good at selecting your shorts, you can make money even in a positive market, but that way if the market tanks, you should have some positions that are up. You can then cover them and use some of your proceeds to swing at a fat pitch or two on the long side.

Re Pabrai's performance, I'll wait to see the actual numbers if someone puts his annual shareholder letter online this year. He has different funds, and if memory serves, last year only his first fund had positive cumulative returns since inception. Let's see what the new report looks like.

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