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Jacob Wolinsky Interviews Value Investor Whitney Tilson

Whitney Tilson’s bio from http://www.tilsonfunds.com

Whitney Tilson is the founder and Managing Partner of T2 Partners LLC and the Tilson Mutual Funds. The former (http://www.T2PartnersLLC.com) manages three value-oriented private investment partnerships, T2 Accredited Fund, Tilson Offshore Fund and T2 Qualified Fund, while the latter is comprised of two value-based mutual funds, Tilson Focus Fund and Tilson Dividend Fund (www.tilsonmutualfunds.com).

Mr. Tilson is also the co-founder, Chairman and co-Editor-in-Chief of Value Investor Insight(www.valueinvestorinsight.com), an investment newsletter, and is the co-founder and Chairman of the Value Investing Congress (www.valueinvestingcongress.com), a biannual investment conference in New York City and Los Angeles.

Mr. Tilson writes a regular column on value investing for the Financial Times and Kiplinger's, has written for the Motley Fool and TheStreet.com, was one of the authors of Poor Charlie's Almanack, the definitive book on Berkshire Hathaway Vice Chairman Charlie Munger, and teaches financial statement analysis and business valuation for the Dickie Group. He was one of five investors included in SmartMoney’s Power 30, was named by Institutional Investor as one of 20 Rising Stars, has appeared many times on CNBC, Bloomberg TV, Fox Business Network, Lou Dobbs Moneyline and Wall $treet Week, was on the cover of the July 2007 Kiplinger’s, has been profiled by the Wall Street Journal and the Washington Post, and has spoken widely on value investing and behavioral finance. He served on the Board of Directors of Cutter & Buck, a public company that designs and markets upscale sportswear for two years until the company was sold in early 2007.

Prior to launching his investment career in 1999, Mr. Tilson spent five years working with Harvard Business School Professor Michael E. Porter studying the competitiveness of inner cities and inner-city-based companies nationwide. He and Professor Porter founded the Initiative for a Competitive Inner City, of which Mr. Tilson was Executive Director. Mr. Tilson also led the effort to create ICV Partners, a national for-profit private equity fund focused on minority-owned and inner-city businesses that has raised nearly $500 million.

Before business school, Mr. Tilson was a founding member of Teach for America, the national teacher corps, and then spent two years as a consultant at The Boston Consulting Group.

Mr. Tilson received an MBA with High Distinction from the Harvard Business School, where he was elected a Baker Scholar (top 5% of class), and graduated magna cum laude from Harvard College, with a bachelor’s degree in Government.

Mr. Tilson’s parents are both educators and he spent much of his childhood in Tanzania and Nicaragua. Consequently, Mr. Tilson is involved with a number of charities focused on education reform and Africa. For his philanthropic work, he received the 2008 John C. Whitehead Social Enterprise Award from the Harvard Business School Club of Greater New York. He is also a member of the Young Presidents’ Organization. Mr. Tilson lives in Manhattan with his wife and three daughters.



Whitney Tilson was kind enough to devote several hours of his time to let me interview him. I asked him a variety of questions including value investment philosophy, specific stock holdings, and his opinion on the housing market and the economy.

Our conversation is below (note that this is not an exact transcript, but rather my notes from our conversation):

This is usually the first question I ask value investors. Value investing is contrary to human nature. Every value investor has a story how they got started in value investing. What was your catalyst?

I came late to investing. I was very interested in business and attended Harvard Business School. I would read the Wall Street Journal and immediately throw away the section on investing because I had no interest in it.

After college I had no money and I was in debt and after that I went to business school and had business school debt. My parents are teachers and I didn’t grow up with any money. Money is the necessity of invention so in 1995 I had my first $10,000 in my bank in my life. Bill Ackman who I went to college with was still at his original hedge fund Gotham Partners, and he was the only guy I knew in the investment business. He said there was only one thing I needed to do: read all of Warren Buffett’s letters, and that was the best advice anyone has ever given to me. Intuitively it made a lot of sense; just buy a dollar bill for fifty cents.

I read avidly all of Warren Buffett’s letters, and all the books about him, and I read Peter Lynch’s books, and other books about investing, especially value investing.

I started practicing with my own tiny portfolio. In the late 90s I was a classic late 90s bull market genius: I bought high quality businesses like Microsoft, Dell, Home Depot, a little bit of Gap. These were business I thought I could buy and hold forever, I was very naïve.

It was fun and I thought I was God’s gift to investing. In hindsight it was very naïve and I was clueless. After a few years I decided that I wanted to make a business out of my hobby.

I started on Jan 1st 1999, I had three investors: myself, my in-laws and my parents with about $1 million dollars. I managed it out of my bedroom. I had no costs and my wife was a lawyer with a good paying job so she paid the bills and I worked very hard out of our apartment managing the world’s smallest hedge fund. At that point I was still riding my “Nifty fifty” stocks that I had bought four years earlier, and I also owned some Berkshire Hathaway at the time.

I heard Warren Buffett predicting a bubble and I got nervous about it too. I got a job writing articles for the Motley Fool in late 1999 so I have a paper trail where you could read some articles where I talk about the bubble. I started writing there in September and I became a regular contributor in November 1999.

I was preaching the gospel of Buffett, and telling people not to get fooled by the bubble.

I turned out to be right, though I mistakenly thought blue chips like MSFT were good buys. I was wrong in some ways but in the big picture I was right.

I read a lot and learned very fast. I sold enough of the Nifty fifty stocks and bought enough of the value stocks to survive the crash from March 2000- October 2002.

I do not recommend that to young people that they start as I did with virtually no experience in the business. I recommend to many people who write to me, don’t do as I did; instead, go work for someone and learn the business. I was lucky -- in hindsight, I had no business going into this business.

You mention Bill Ackman as your original mentor. Do you subscribe to his philosophy of investing? You mentioned Warren Buffett as your mentor also. There are many different styles in value investing ranging from Benjamin Graham's net-nets to Warren Buffett's purchase of companies with wide moats? What style do you must subscribe to?

We draw from every different style. Value investing is simply buying a stock at a significant discount to its intrinsic value. The closest classic value stock we own which is almost a net net is a small retailer named Delias which is trading close to cash. We also own Berkshire Hathaway which has $186 billion market cap which is more of a growth at a reasonable price. We also own General Growth Properties; the company is in bankruptcy which I would classify as a special situation. We try to find lots of different value opportunities and we try to keep an open mind.

On a similar note Graham held stock short, so did Schloss. The biggest jump made by Buffett was really caring about the quality of the businesses he invests in. Benjamin Graham was mostly quantitative not qualitative. Phillip Fisher and Charlie Munger made Buffett see out in the future and what is called looking through the numbers. Have you adopted the same approach in you look through the numbers?

Benjamin Graham’s core investment approach was buying statistically extremely cheap stocks. Walter Schloss and more recently Paul Sonkin of Hummingbird Capital are a good example of that fundamental approach.

Buffett in his early career made his fortune buying extremely low-quality business like Berkshire Hathaway, which was a dying textile business, at extremely low multiples of cash flow and/or discounts to liquidation value, so called net nets. Berkshire was in fact a net net when Buffett bought it. He once joked that in the 1950s or 1960s he would buy companies at 2x earnings and sell them at 3x earning and make a 50% profit. He would then find another business selling at 2x earnings and buy it.

Thanks slightly to Phillip Fischer but mostly to Charlie Munger and due to his own learning -- Buffett is a learning machine -- Buffett began to appreciate higher quality businesses and businesses that could grow value over time and how valuable those valuable could be. In my opinion, See’s Candies is the first example of a business in his career where he paid up for a high-quality business with a brand and moat and Charlie Munger helped him see that value and pay a higher price then he normally would have paid.

The problem with being an investor in net net stocks is that they are very small and illiquid. Buffett knew that to grow his wealth he would have to cast a wider net to put more capital to work.

It sounds like you think that Warren Buffett changed his business style due to the forces of circumstances. Do you think Warren Buffett would be a Net-net investor if he was much managing less cash?

Yes, that is absolutely true. He has been asked this question many times and responded that if he were to be managing very little money he would be looking in the nooks and crannies looking for extreme temporary mispricings. If you know where to look, you can sometimes find extreme temporarily mispriced stocks. However these stocks are usually small and it is hard to put much money into them. Not in a million years would Buffett own Kraft if he was managing $10 million.

Considering that the world today is different from the time of Graham and Dodd where more attention has to be focused on owner's earnings and cash flow, what do you suggest as the best resource for learning financial statement analysis including proper statement adjustments from a value perspective?

I do not have a good answer for this. I am self taught and have just done a lot of reading. There are a lot of good books. Thorton O’Glove wrote Quality of Earnings on finding red flags in earnings. Howard Schilit wrote Financial Shenanigans. Tim Koller wrote a book called Valuation.

These books talk more about discovering red flags in earnings and do not discuss how to read a financial statement. Some people before they consider becoming investors should take some classes, or go to business school, or get a CFA so they have basic knowledge.

Security Analysis of course is one of the original books. If you read these books you will learn accounting.

Value investing is just buying something for less than it is currently worth. Why is it so misunderstood? It seems simple to understand but most people don’t get it , why?

Most people can fairly quick understand the concepts. I think there are two main reasons people don’t practice it.

1. Value investing requires patience -- it is get rich slowly investment philosophy and most people want to get rich quickly. So the natural human inclination is to try to find a stock that will beat earnings by a penny next week and therefore the stock will jump 10%. People play short-term games trying to guess quarterly earnings.

2. To be value investor you have to be able to estimate intrinsic value. It is really hard to value businesses. You have to make predictions about the future and industry dynamics and that is very hard to do. I can tell you after getting a Harvard MBA and spending 11 years in the business it is still really hard to do.

I cannot value most businesses because they are out of my circle of competence. Even Buffett says he can’t value most businesses. I’d guess that 90% of investors do not have skill or training or experience to value businesses. And if you can’t value businesses you can’t be a value investor by definition.

Therefore you play the momentum game or short term game or some other game.

You just mentioned that the average person cannot be a value investor. Studies have shown that if you buy a basket of value stocks low P/E, low P/B etc they will outperform over time. Why can’t the average investor just buy a basket of value stocks?

It is clearly better to be fishing in the pond of smaller stocks especially if you are a small investor, as well as statistically cheap stocks (low P/B, low P/E, low enterprise value etc.). Those are the ponds you want to be fishing in. That said, there are the world’s greatest PhD mathematicians, top quants like Jim Simons, who take statistically cheap approaches. I would emphatically advise individual investors against trying to implement on their own a Dogs of Dow-like strategy or any kind of mechanical or formulated strategy. I promise you that super-computers will beat you with that.

First and foremost look at industries you know. But considering there 8,000 or so publically traded companies you want to narrow that universe; look in those industries for you know something about. Then in those industries look for out of favor, statistically cheap, beaten down stocks. Then look for those that might be able to fix themselves.

I know a lot about the restaurant industry and have made a fortune over the years investing in McDonalds, Denny’s, Yum Brands, Jack in the Box, CKE Restaurants and others. Today we are finding that the biggest blue chips like McDonalds are undervalued. Though we don’t own it, I would rather own McDonalds than the S&P 500 index fund for example. So sometimes the best risk-reward is sitting right in front of your nose.

Today an investor could do nicely – though you will not double your money quickly, but you can double it over a period of five or six years -- owning a basket of blue chip stocks like Berkshire Hathaway (one of our largest holdings), Microsoft and Pfizer. So there are a number of blue chips out there that you can own and do very nicely with.

I know your fund has been short Interoil and there are those that claim the company is all hype. But George Soros and Goldman Sachs are also big recent investors. What is your current take on IOC?

I don’t want to comment on the company specifically. The only thing I will say is I have never been in a significant short position where there was not a credible long investor with a good track record on the other side.

For example during the financial meltdown look at the value investors who were long MBIA, AIG, Fannie, Freddie, etc. So the fact that any investor is long any stock that we are short or considering shorting is not relevant. We do our own work and differing opinions are what makes markets. If you are ever going to short stocks you have to be comfortable with the fact that there will be some smart investor with the other point of view.

In your book released in mid 2009 you wrote a detailed analysis of WFC and MBIA, what is your opinion of those companies now?

I wrote the book in a span of five weeks from February to mid March.

You wrote the book in five weeks?!!

Yes, we finished the book in mid-March as the market was bottoming. The publisher turned it around and it was released in the first week of May.

In the case of MBIA, our views haven’t changed at all -- the exposure to toxic structured finance products is the same and we still think all their reserves will be wiped out.

There was an article in Bloomberg News this past week about how the major bond issuers have over $1 trillion in exposure to municipal finance bonds. We didn’t even look at that book when we analyzed our short of MBIA, but obviously states and cities across the country are facing major budget crises.

The major muni insurers, MBIA, Assured Guaranty and Ambac, cumulatively have reserved only 4 basis points of reserves against their muni finance books! This is a whole area we didn’t cover in the chapter on MBIA in our book.

MBIA is trying to get rid of their toxic liabilities by trying to create a good bank/ bad bank structure. Many debt holders are suing MBIA to have a judge rule that this is a fraudulent conveyance. So far the lawsuits are proceeding in the debt holders favor.

This is the only stock we were short that we wrote about in our book. Since it was published, many financial stocks doubled but MBIA has not moved at all because of its continuing terrible fundamentals.

With Wells Fargo, the stock has more than doubled and that has dramatically changed the risk reward ratio. We own a very small residual position but we basically exited the position because we fear the losses to come.

That said, Wells Fargo is clearly going to be able to earn its way out of trouble. Their earnings have been even greater than we modeled in our book. There is no question that this will be a $60 stock one day once the economy returns to normal. However the economy might not return to normal levels for many years -- it could be as long as five years. We think investors are rushing into financials thinking the worse is behind us and in two years we will be back to normal. However, we think it could be more than five years until we get through the whole housing and commercial real estate mess.


I would give us an A for the second half of our book where we discussed six investment opportunities – those ideas have worked out well.

Regarding the first half of the book, where we discussed the housing market, I would give us a B. Because of massive government subsidies, both constricting supply and stimulating demand, the housing market stabilized somewhat sooner and at a somewhat higher level than we anticipated. That said, the reason I would give us a B and not a C or D is because we said the aftermath of the housing bubble would be with us for years and there would be millions of foreclosures that would have to come through the pipeline to get to normal inventory levels. And all of those things are proving to be correct.

Today things are terrible out there but we are no longer in freefall. The patient is stable but critical as opposed to crashing but critical. We think the signs of a turnaround that have gotten investors excited will prove to be temporary. Even in the past week things like existing home sales, new home sales, and inventory data have been weak.

Interest rates have nowhere to go but up -- not that I am predicting that any time soon -- so things are going to remain ugly for the next few years. However, we are not so bearish that we think there is going to be a major collapse. I think the government will do what is necessary to prevent that.

And I am guessing you think there are more bank losses coming?

Absolutely. The banking system is probably between 60-65% through in terms of total write-downs that will need to be taken. This still means a number of years more of write-downs.

Sheila Bair (head of the FDIC) said this week that there will probably be more bank failures this year than the 140 last year. Smaller banks, which tend to have larger exposure to commercial real estate, will be under the greatest stress.

[What is your outlook for the economy and does that effect your investment decisions or you completely a bottom up investor?

The single biggest lesson for us of the collapse of the stock market is that it is not enough to be a completely bottoms-up investor. That is a mistake some value investors made and they paid a horrible price. We were in the Warren Buffett, Peter Lynch camp where if you spend more than 10 minutes a year focusing on macro concerns, that is ten wasted minutes.

We discovered that the way you calculate intrinsic is usually a function of discounted cash flows -- and if the economy collapses, the cash flows forecasts can be thrown out the window and are worthless.

Therefore having an opinion of some major economic shock and taking steps to protect yourself is a prudent thing. In fact it was our obsession with housing markets that saved us. If we had not figured out that the housing market was going to collapse and taken steps to short a lot of financial stocks and protect ourselves, I don’t know if we would be around today.

We have not become top-down investors, but I would say instead of being 98% bottoms-up and 2% top-down investors, today we are 75% bottoms-up and 25% top-down. Our net exposure is very much driven by whether we think we will have a V-shaped recovery or a slower recovery.

And I assume you do not predict a V-shaped recovery?

My best guess is that there is a 20% chance of that. I think there is a 50% chance of a long, slow recovery (though not necessarily a recession) characterized by the unemployment rate remaining stubbornly high for the next 3-5 years. Finally, I think there is a 30% chance that things are worse than that. With such a wide range of outcomes and valuations reflecting only be best-case scenario, we are investing cautiously.

We aren’t perma-bears however. If you think the world is going to go to hell, then you would own gold, cash and have a big short book, but we are not doing that. We have a big short book but our long book is larger.

If you think the middle-case scenario I outlined above is going to happen (which I think is most likely), then you will invest cautiously on the long side and buy stocks with very strong balance sheets like Berkshire Hathaway and Microsoft, and then you will have a big short book to cover the downside.

If you believe there will be a V-shaped recovery you will buy speculative stocks, cyclical stocks and companies with lots of debt. We were buying those stocks 10 or 11 months ago because they were the most out-of-favor stocks, but now are the most in-favor stocks. We are selling those stocks and in fact shorting them to hedge our bets.

What are your thoughts about the Simon offer for GGP? Do you think they should accept it?

General Growth as we speak is our largest position in part because we have been letting it run. We shorted it from $40 to $1, but then, after it filed for bankruptcy and after we saw Bill Ackman take a large position and knowing his record in the real estate business (and of course after doing our own analysis), we purchased the stock. We thought the equity could get wiped out but we also thought there was a possibility of a $20 upside, so the expected value was much higher than the stock price.

Virtually everything we could have possibly hoped for has happened, and we still think there is upside even from today’s level of about $13.70.

Now that a bidding world is underway between Simon and Brookfield we think the downside is fairly limited at the current price and that higher offers are coming, so there is a good chance of getting at least $20 out of this.

The main risk we worry about is the macro risk that the world falls apart again, that the economy goes into a double dip, and credit markets freeze up. Assuming the macro environment doesn’t deteriorate materially, we think the upside versus downside equation is very favorable. I would vote for an offer above $20 and that’s where I think the bidding will eventually end up.

We believe General Growth is a unique asset that a number of buyers would love to own outright or a significant fraction of it. Brookfield is not offering an outright buyout; they are looking to purchase 30% of the company. We think the bidding goes higher so we are staying with our position.

As a Berkshire holder I am curious what you think of the BNI deal? There has been a lot of controversy over whether this deal was smart in the value investment community.

We own Berkshire and we have not modified our estimate of intrinsic value as a result of the BNI acquisition. Buffett didn’t steal BNI, but we don’t think he overpaid either.

Berkshire has $62 billion of float, so this deal makes sense for Berkshire -- and only Berkshire. We think Buffett has bought the equivalent of a utility here. The Chinese are not going to come in and build a competing railroad, so there is no foreign competition. In fact, we think globalization will benefit BNI.

The deal is not complex. Berkshire is drowning in capital and he was able to buy a good business at an okay price. When you have as much capital as Buffett, it is hard to steal something.

Do you anticipate more aggressive expansion and higher cap-ex at Burlington under BRK ownership compared to when it was independent?

No. I think Burlington will continue to operate largely the same way. I do not expect many major changes. I do not think Buffett bought BNI because he thought that under Berkshire’s umbrella he could make major changes to benefit the company.

I have heard a couple of articles speculating that BNI owns so much real estate along its tracks that it could put in fiber optic cables or wind farms, so maybe this could be a play on the continuing rise of the internet or alternative energy.

Personally, I do not put much credence in these theories and would be shocked if that was a major factor in Buffett’s purchase. But it is nice to think of a little bonus like that.

In your dividend fund you hold XOM I am curious what you think of the XTO deal and if you have an opinion why Buffett sold his stake so quickly?

Zeke Ashton runs the Tilson Dividend Fund entirely independently of Glenn Tongue and me. You can ask the question directly to Zeke. Zeke is a great manager and has actually been putting us to shame with his performance.

Glenn and I manage the Tilson Focus Fund.

You run a lot of things: a mutual fund, three hedge funds, a conference, a newsletter, and are an author. You still have quite a future ahead of you. Do you see yourself more becoming a value thinker like Bruce Greenwald or more of a value investor like Warren Buffett and others? Or a combination of both?

I think I am already doing a great deal of both. I view myself as an investor and that is my passion and my career. But I like to teach and I think there is a good ethos in the value investing community of giving back and sharing and teaching.

That is how Warren Buffett learned -- because Ben Graham was willing to teach him. That is how I learned -- because Warren Buffett was willing to teach me and others through his writings and his annual meetings.

Similarly, I feel an obligation to give back and share my experience so other people don’t have to learn things the hard way. Value investing is very, very much an experience-based business and I view being good at value investing as being akin to becoming a good brain surgeon or fighter pilot. They are both professions in which you can go to school and learn basic skills, but then you need to go out and get experience. The more experience you get, the more skilled you become, but if you get experience the wrong way, you can die so it’s important to gain experience from others who are more experienced.

For most people I suggest going work for someone who will teach you. But if you don’t have that opportunity, you can do what I did by becoming a learning machine and reading all about Warren Buffett and his annual letters and going to the Berkshire annual meetings, and then learning from Charlie Munger by going to the Wesco meeting and reading Poor Charlie's Almanack. What we try do with the Value Investor Insight newsletter and the Value Investing Congress is give people a way to learn from other smart investors.

Below are some links to some of Whitney Tilson’s websites:

www.tilsonfunds.com: Whitney Tilson’s value investing resource page

www.valueinvestorinsight.com: newsletters

www.tilsonmutualfunds.com: mutual funds

www.valueinvestingcongress.com: conferences

Whitney Tilson's three books

Poor Charlie's Almanack: The Wit and Wisdom of Charles T. Munger

More Mortgage Meltdown: 6 Ways to Profit in These Bad Times

Value Investing Course: Essential Strategies for Market-beating Returns


About the author:

Jacob Wolinsky
My investment ideas have been inspired by many of value investors including Benjamin Graham, Charles Royce, John Neff, Joel Greenblatt, Peter Lynch, Seth Klarman,Martin Whitman and Bruce Greenwald. .I live with my wife and daughter in Monsey, NY. I can be contacted jacobwolinsky(AT)gmail.com and my blog is www.valuewalk.com

Visit Jacob Wolinsky's Website


Rating: 4.1/5 (34 votes)

Comments

rnagarajan
Rnagarajan - 4 years ago
Thanks for the article. Well done. Is this the Delias that he mentioned?

http://www.google.com/finance?q=NASDAQ:DLIA
fk
Fk - 4 years ago
Those were good questions, and an interesting read. Nice work!
yswolinsky
Yswolinsky - 4 years ago
Thanks for all the comments Whitney besides being brilliant is a very nice guy, I think he spent about an hour and a half on the phone with me, and he would have spent more time had I requested

yswolinsky
Yswolinsky - 4 years ago
I am surprised that there have been no smear attacks on Whitney yet as some people on this site love bashing some of the top gurus. I also was surprised my last Israel article did not turn political. Maybe people are starting to become more civil here.
yswolinsky
Yswolinsky - 4 years ago
BTW I know this is not the forum but I dont know where to ask how does the whole following columnist thing work?
DaveinHackensack
DaveinHackensack - 4 years ago
Not a bash, Jacob: Tilson is obviously a smart guy (being a Baker scholar tells you that) and seems like a nice guy as well (e.g., being generous with his time with you). But all those Buffett shareholder letters he's read haven't seemed to translate into much in the way of outsize returns for the shareholders in his flagship mutual fund.

The really impressive thing about Tilson is that he's managed to build successful businesses around value investing (his conferences, newsletters, books, media appearances). There's a lesson in that: there are better odds in selling picks & shovels to the prospectors than there are in digging for gold yourself.

yswolinsky
Yswolinsky - 4 years ago
Not such a long time frame.

He also has at least one hedge fund we dont know the performance of that
DaveinHackensack
DaveinHackensack - 4 years ago
Can you call him back and ask him for his hedge fund performance numbers?
yswolinsky
Yswolinsky - 4 years ago
it is illegal to report it
DaveinHackensack
DaveinHackensack - 4 years ago
Pabrai publishes an annual letter with his hedge funds' performance numbers. Tilson doesn't do the same?
yswolinsky
Yswolinsky - 4 years ago
It is illegal to disclose any info about a hedge fund in an interview I believe. They cant even mention the word. That is what I have been told in numerous interviews
yswolinsky
Yswolinsky - 4 years ago
Maybe someone who has knowledge in this area can inform us
DaveinHackensack
DaveinHackensack - 4 years ago
OK, thanks for that elaboration. Perhaps one of Tilson's annual shareholder/limited partner letters will find its way to GuruFocus in the future.

xuzhu
Xuzhu - 4 years ago
daveinhacknsack, you have always criticized every value investor out there, including pabrai. what's your point? :)
DaveinHackensack
DaveinHackensack - 4 years ago


daveinhacknsack, you have always criticized every value investor out there, including pabrai. what's your point? :)


I haven't criticized every value investor, but I have noted that Tilson and Pabrai are much better salesmen and self-promoters than they are investors. Pabrai, at least, had a few years of impressive returns, though most of his investors (i.e., those who didn't join his first fund) are probably still under water (for more of my thoughts on Pabrai, see "Mohnish Pabrai: A Super salesmen, not a super investor"). As for Tilson, I see no evidence of impressive returns on his part.

Value investors are supposed to objectively assess data, aren't they? Tell me objectively what impresses you about Tilson's investing.

Looking forward to hearing your well thought-out response.

yswolinsky
Yswolinsky - 4 years ago
Here is Buffetter's comments about Bruce Greenwald. I think they apply a lot to Whitney Tilson as well

This conversation is missing the point in my opinion. The important questions are

(1) Do Greenwald's ideas make sense?

(2) Do Greenwald's ideas stand the test of time?

From my experience, the answer to both questions is a resounding "yes." I like his concept of deprecating future growth projections in favor of the present situation and balance sheet, including realistic estimates of intangibles. I like his concept of determining what it would cost a competitor to replicate the business. I like the idea that growth without a moat has no value to an investor. These same ideas, of course, can be found inWarren Buffett's writings and speeches. What Greenwald adds are the details and techniques needed to reduce the ideas to practice.

I do not know anything about Greenwald's track record as in investor. But it doesn't matter.
Amit Chokshi
Amit Chokshi - 4 years ago
The questions/interview itself was very good, much better than morons from MSM that interview these types so kudos on that.

But Tilson...not bad to raise $1MM between a recent HBS MBA that's in debt, his teacher parents w/no wealth, and his inlaws...

Tilson is a genius businessman but hardly a sharp investor. The better question would be to ask with all of the various activities and other pursuits you have in terms of side businesses, how do you focus on giving 100% to your limited partners and mutual fund investors.

With managing $200MM or so, why do you have megacap holdings like BRK and then also invest in so many of the same picks as Greenlight and Ackman? If you're a WEB disciple there is almost no reason to own BRK. A 20% discount to IV for that vs prob 50% discount to IVs for other companies? Notice how he takes credit for MBIA and GGP but we never heard Tilson talk about these until Ackman had pretty much laid the case out.

I'd like to run $200MM and I give Tilson credit for raising about that much but I don't see him raising a lot more because I think many people kind of get his deal. With all of his media exposure and activities, his mutual fund AUM is pretty low and his hedge fund AUM has been pretty stable.

He's plugged into this HBS network, I'm sure Ackman helped raise some additional money as Ackman's dad is a very wealthy NY real estate guy but he doesn't get past the institutional players that have guys like Greenlight and Ackman at billions in AUM. Not to mention Glenn Tongue has his former DLJ contacts which prob comes in handy. For these types, raising $50MM-$100MM is nothing.

There are other value funds that come out and crank it up to $500MM-$1B pretty quickly as well w/little fanfare. T2 is a HNW and smaller FoF play, the bigger players don't see a reason to invest with T2 when they can get the real think with Greenlight or Ackman (ackman's overrated as well, more of a marketing guy that takes big bets). 1.5/20 for BRK exposure and a lot of copycats from 13Fs? This guy took a beating on TGT, BKS, BGP just as Ackman did...where's that independent streak value investors are supposed to have? As much group think as a hopped up Cramer fan.

yswolinsky
Yswolinsky - 4 years ago
Thanks for the comments dizzy and good analysis. you bring up some very valid points. I also appreciate your compliments

In regards to Berkshire.

He says he does not limit himself to any one type of investment.

In addition he now takes somewhat of a slight top down approach. Taking that approach he believes strong companies like berskhire might outperform other companies with a weaker balance sheet over the next few years when he expects a week economy.
DaveinHackensack
DaveinHackensack - 4 years ago
Here is Buffetter's comments about Bruce Greenwald. I think they apply a lot to Whitney Tilson as well.Here is Tilson, from your interview with him:

I view myself as an investor and that is my passion and my career.

According to the thread where you lifted that Buffetteer quote, Greenwald views himself primarily as a scholar, not as an investor. Greenwald is a Ph.D. with 30 years academic experience, and is widely respected by value investors with much better track records than Tilson. Tilson's a guy who, by his own admission, taught himself value investing by reading books and Buffett's shareholder letters. He's a mediocre investor but a brilliant salesman and entrepreneur who has made the most of his wealthy contacts. I give him a lot of credit for that.

yswolinsky
Yswolinsky - 4 years ago
I was not comparing the two completely. They obviously have very different careers and experiences.

That being said I think some of the comments Buffetter made about Greenwald apply to Whitney Tilson as well.
DaveinHackensack
DaveinHackensack - 4 years ago
Fair enough, Jacob. I will say that Tilson offers one fairly useful insight (to those who haven't considered this before), about how a deliberate ignorance of the macro picture* hurt a lot of value investors in recent years.

*That raises other questions, which Sivaram has asked here before; namely, figuring out the macro picture presents its own challenges. One approach seems to be the Jim Rogers way of trying to predict secular trends and invest accordingly; another seems to be the Hussman way, of being guided by long term statistical trends and adjusting valuations accordingly.
yswolinsky
Yswolinsky - 4 years ago
I am going to address how value investors should look at macro picture when I post my interview with Bruce Greenwald. I am going to send him the transcript today and when he reviews I will post.

I only got to ask him three questions and that was one of them namely whether value investors should take more of a macro view in the future.
yswolinsky
Yswolinsky - 4 years ago
BTW for the people who dont like Greenwald here just in the few minutes of talking to him you see right away how sharp he is and how much his ideas make sense. I challenge anyone who spoke directly to him or have taken his classes to argue with me on that point
DaveinHackensack
DaveinHackensack - 4 years ago
Who here has said they don't like Greenwald?
Amit Chokshi
Amit Chokshi - 4 years ago
Greenwald is a good teacher, I have always just found it funny that he was such a wreckless investor despite his knowledge. And it's not really akin to say a good basketball or other sports coach not being a great player since investing is mental/emotional so you should be able to apply what you learn to some degree if you know it. The funny thing with Greenwald is at least according to Lowenstein's WEB book the guy knew the value investing approach but his investing style appears to be more speculative than a penny stock investor.

But value investing is not about taking classes at places like Columbia. You will learn more investing on your own using say books from Level II of the CFA (covers financial statement analysis, accounting, finance, etc) and going over your mistakes. I keep a list of my biggest f ups on my desk to keep my ego in check at times and make me triple check my investment thesis for other stocks. I learned more about those failures than any successful investments.
yswolinsky
Yswolinsky - 4 years ago
I dont know much about Greenwald's history as an investor. care to enlighten us?
AlexSF
AlexSF - 4 years ago
Dave,

This is my first time posting here but I've enjoyed reading your comments and your blog for a couple years and have always thought you were a smart investor and rational, objective thinker.

But if you don't think Pabrai's returns for the entire decade have earned him the right to be thought of as a great investor and more than just a good salesman and self-promoter, then you're not only intellectually dishonest, but really drinking the haterade, and it would lead me to wonder why you would willfully ignore basic facts with your earlier comment. Maybe I haven't read enough of your posts but this one reeks of bitterness.

http://www.marketfolly.com/2009/10/mohnish-pabrais-hedge-fund-q3-investor.html

Best,

Alex

[/i]
[i] daveinhacknsack, you have always criticized every value investor out there, including pabrai. what's your point? :)


I haven't criticized every value investor, but I have noted that Tilson and Pabrai are much better salesmen and self-promoters than they are investors. Pabrai, at least, had a few years of impressive returns, though most of his investors (i.e., those who didn't join his first fund) are probably still under water (for more of my thoughts on Pabrai, see "Mohnish Pabrai: A Super salesmen, not a super investor"). As for Tilson, I see no evidence of impressive returns on his part.

Value investors are supposed to objectively assess data, aren't they? Tell me objectively what impresses you about Tilson's investing.

Looking forward to hearing your well thought-out response.

DaveinHackensack
DaveinHackensack - 4 years ago
Alex,

You've accused me of intellectual dishonesty with no facts to back up your accusation. I'm not sure where you got that from the post I linked to above, "Mohnish Pabrai: A Super salesmen, not a super investor". Feel free to point out my intellectual dishonesty there. I am pasting the contents of that post and the first two comments on it below, for your convenience.

------------------------------------------------------------------------------------------------------------------------------------------------

Mohnish Pabrai is clearly savvy at self-promotion (as I noted elsewhere last year) and a consummate salesman, judging by the hundreds of millions of dollars of assets he's gathered. I think it's clear by now though that he's not a great investor. If it's not, these notes on Pabrai's 2009 Chicago investor meeting, compiled by Miguel Barbosa of Simoleon Sense may be instructive. Reading them, you'll be reminded that Pabrai used to use shares of Berkshire Hathaway as a "placeholder for cash", which made absolutely no sense; that he ignored his own adviceabout avoiding retailers (not to mention his alleged preference for small caps) when he invested in Sears; and that he has belatedly realized that a highly-leveraged, subprime lender (Compucredit, on which Pabrai took a 72% loss1) might not do well during a credit crunch.

A couple of years ago, I sent a copy of Pabrai's book, The Dhando Investor2, to a friend of mine who works in the Southern California office of a firm that was initially established as the family office for a Gilded Age family, and now handles the finances for other wealthy families. At the time, I figured my friend's firm might be interested in looking at Pabrai as a candidate for its stable of outside investment managers, but now I think a better role for Pabrai would be as a salesman for a wealth management firm (though perhaps one with a lower minimum asset requirement than my friend's firm).

If I were Pabrai, I would quietly approach some leading wealth management/family office firms about them absorbing Pabrai's assets under management and bringing Pabrai on to gather assets for the firm from affluent Indian Americans. Pabrai could probably add more value to his wealthy clients as an excellent salesman than as an investor.

1Pabrai also doubled down on a subprime mortgage lender, Delta Financial Corporation,after the securitization market seized up in August of 2007. He held his stake until that company went bankrupt.

2Pabrai's brief book actually contains some interesting stories about entrepreneurship (Pabrai was an IT entrepreneur before becoming a hedge fund manager), but Pabrai himself ignored some of the lessons in those stories. For example, Pabrai wrote about the ethnic Indians whose businesses were expropriated by Idi Amin, and despite this, Pabrai invested in an oil company based in Hugo Chavez's Venezuela.

Comments:

Anonymous said...
You make it sound as if superinvestors ought to be infallible. Nobody is. Under your stringent criteria, nobody could be called a superinvestor. I will not go so far as to suggest that Pabrai could yet be dubbed a superinvestor, but your reasoning eliminates the valuable learning process all investors go through.



DaveinHackensack said...
My main issue with isn't that he's made mistakes (everyone does) but his lack of any coherent investment methodology, his tendency to repeat the same mistakes, and his apparent inability to learn from them.

Consider, for example, his explanation of why he doesn't use Berkshire as a 'placeholder for cash' anymore. In Miguel's notes, Pabrai says its because some of Berkshire's businesses are not positioned to do well in the current economy. Wrong answer. The right answer is that you shouldn't use any common stock as a placeholder for cash because it doesn't maintain a stable value like cash does.

Consider also the example of Sears. Pabrai knew the problems with investing in retailers -- in fact I posted his article about that very subject here last year -- and yet he invested in Sears anyway. Why? He gave the usual bullshit reason about it being a "collection of assets managed by a master asset allocator" but Lampert himself had dismissed talk of Sears being a "hedge fund in disguise". Pabrai seems to have invested in Sears for two reasons:

1) He got his head handed to him on a series of investments where he went solo.

2) He had the comfort of the herd investing in Sears.

Also, consider the example of Compucredit. Pabrai blames them for "predatory lending"? That's a tendentious characterization of their business, and it's besides the point anyway. The company was risky because it was a highly-leveraged, subprime lender, at the tail end of a massive credit bubble. Not because it was "predatory". Pabrai's answer there is more about his desire to be admired (similar to Buffett's), and doesn't get to the heart of the risks associated with Compucredit.

madbulk
Madbulk - 4 years ago


Maybe someone who has knowledge in this area can inform us


I think I have knowledge in this area. But take it with a grain of salt. I'm not in the fund. But I believe I saw a chart once, not that long ago, and it reflected well more than double the progress of the market over the past ten years or so.

I'm sorry I can't say it with certainty. So, is this information? I think so. Not certain. Just trying to be ever so slightly helpful. :)

Edit: That's not what I meant to say... what I meant was that it had well more than doubled, meaning up well over 100% where the S and P was flat. The chart as I recall looked something like 10% a year for about 10 years.

yswolinsky
Yswolinsky - 4 years ago
I did some investigations into Whitney Tilson's performance and this should settle the record for all his critics once and for all.

Whitney Tilson's mutual fund was launched on March 15th 2005. It has been almost exactly five years since its launch and the fund is up 20.4% versus 3.7%. This is not spectacular but it covers both a bull and bear market, and is better then the vast majority of fund managers who underperform the market. Over the past twelve months the fund is up 112%!

In addition Whitney Tilson likes shorting to hedge his positions. This is not allowed in his mutual fund.

The more important figure is Tilson's hedge fund performance. The hedge fund is nearly ten times as large as his mutual fund in terms of assets. In addition Tilson is allowed to short in his hedge fund so it better reflects his true performance

Whitney is not allowed to advertise his performance to regular investors. However, someone posted a great article on the Motley Fool yesterday regarding Tilson's hedge fund performance. The fund since its inception 11 years ago is up 219.6 % versus about zero for the S&P 500! Here is the link to the article _http://www.fool.com/investing/general/2010/03/02/the-best-investor-youve-never-heard-of.aspx

I think this settles the record. Tilson is not only a great value thinker, he is a spectacular investor and has a very bright future in front of him.

kfh227
Kfh227 premium member - 4 years ago
When it comes to value inveestor or salesman, it is usually easy to figure out. YOu'll see a couple of things:

Salesman:

1) alot of stocks under management (100+). I don't care who you are. If you have 100 stocks, that's not investing. Alot of turnover.

2) Promotional (always on CNBC)

[size= 12px][/size]Value Investor:

1) Rarely on TV. How do you get more customers? By taking care of your current customers

2) Smaller basket of stocks.

I really think there are some wonderful value investors out there. Seth Klarman being one. Never on TV. Good record. Doesn't own a ton of stuff. Gurufocus says he has 17 stocks right now
yswolinsky
Yswolinsky - 4 years ago
KFH you can be a great investor and diversified. Look at Dreman or Tweedy Browne, or Paul Sonkin.
xuzhu
Xuzhu - 4 years ago
dave, maybe you can also show us your 20 yr, 10 yr, 5 yr absolute performance?
Amit Chokshi
Amit Chokshi - 4 years ago
http://finance.yahoo.com/echarts?s=TILFX#chart2:symbol=tilfx;range=5y;compare=^dji+^ixic+^gspc;indicator=volume;chart;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

if TILFX, the dividend fund is run by I think Zeke Ashton and some other former Fool guys.

hedge fund marketing is loose, he's been on bloomberg where they talk specific numbers, I've heard them specifically ask and he's verified numbers on interviews with Carol Massar (3PM Bloomberg).

His annualized return is 9%, the dow is 4% over the same period, SP 1%. he has stated his goal was a CAGR of AT LEAST 15% over 3-5 years. which is what most hf guys go for.

When you figure some long-only funds have done that if not better, that is when you have issues.

Hedge funds are held to higher standards, just the way it is because there are comparable returns with less risk. There are market neutral long/short hedge funds that have done 9-11% per year so that means they have low volatility, high sharpe ratios. Market neutral is 0% market exposure, every long exposure is paired with a short. it's not my investment preference and the guys that do this style of investing are never in the media becaus its not sexy, u are really looking at max returns of 12% in a given year with that strategy but they do hold up, u dont get drawdowns of 15% w/the bulk of market neutral funds. So if you are a big investor and will pay 1.5%/20% for 9% with low vol or 9% with drawdowns of 18% and 20% in prior periods, u are going to with 9% and low vol.

If you are going to gun it a bit and be net long at around say 50% as T2 tends to be, 9% is just not going to get institutional investors excited. They'd actually prefer a Pabrai (or better like Tepper or Falcone) that will be down big but can get the triple digit returns too because at least they know the vol they are getting and allocate for that but again. Why take 9% with a 50% net long fund when you can hang with Einhorn and get 17% for actually slightly less market exposure (he runs under 50% at times). That's the universe Tilson is facing, he's raising money not against say David Winters or Yachtmann, that's a lot of retail, brokerage, and financial advisors kicking money over there. he's going against his hedge fund buddies for capital, the big institutional investors splice all of this return info across categories to figure out who to invest with.

AlexSF
AlexSF - 4 years ago
Dave,

Please click on the link attached to my original post above which will have the facts that refute the part of your first post quoted below which I took issue with.

I'll even include it again in case you can't find it:

http://www.marketfolly.com/2009/10/mohnish-pabrais-hedge-fund-q3-investor.html

Dave wrote:

"I haven't criticized every value investor, but I have noted that Tilson and Pabrai are much better salesmen and self-promoters than they are investors. Pabrai, at least, had a few years of impressive returns, though most of his investors (i.e., those who didn't join his first fund) are probably still under water"

Everything else you've written is meaningless to the discussion. If you don't think his verified performance for the entirety of the decade he's run his hedge fund across two different horrible markets is evidence of a great investor, then we just have a fundamental difference of opinion about what constitutes a great investor.

Thanks for your note,

Alex

You've accused me of intellectual dishonesty with no facts to back up your accusation. I'm not sure where you got that from the post I linked to above, "Mohnish Pabrai: A Super salesmen, not a super investor". Feel free to point out my intellectual dishonesty there. I am pasting the contents of that post and the first two comments on it below, for your convenience.

------------------------------------------------------------------------------------------------------------------------------------------------

Mohnish Pabrai is clearly savvy at self-promotion (as I noted elsewhere last year) and a consummate salesman, judging by the hundreds of millions of dollars of assets he's gathered. I think it's clear by now though that he's not a great investor. If it's not, these notes on Pabrai's 2009 Chicago investor meeting, compiled by Miguel Barbosa of Simoleon Sense may be instructive. Reading them, you'll be reminded that Pabrai used to use shares of Berkshire Hathaway as a "placeholder for cash", which made absolutely no sense; that he ignored his own adviceabout avoiding retailers (not to mention his alleged preference for small caps) when he invested in Sears; and that he has belatedly realized that a highly-leveraged, subprime lender (Compucredit, on which Pabrai took a 72% loss1) might not do well during a credit crunch.

A couple of years ago, I sent a copy of Pabrai's book, The Dhando Investor2, to a friend of mine who works in the Southern California office of a firm that was initially established as the family office for a Gilded Age family, and now handles the finances for other wealthy families. At the time, I figured my friend's firm might be interested in looking at Pabrai as a candidate for its stable of outside investment managers, but now I think a better role for Pabrai would be as a salesman for a wealth management firm (though perhaps one with a lower minimum asset requirement than my friend's firm).

If I were Pabrai, I would quietly approach some leading wealth management/family office firms about them absorbing Pabrai's assets under management and bringing Pabrai on to gather assets for the firm from affluent Indian Americans. Pabrai could probably add more value to his wealthy clients as an excellent salesman than as an investor.

1Pabrai also doubled down on a subprime mortgage lender, Delta Financial Corporation,after the securitization market seized up in August of 2007. He held his stake until that company went bankrupt.

2Pabrai's brief book actually contains some interesting stories about entrepreneurship (Pabrai was an IT entrepreneur before becoming a hedge fund manager), but Pabrai himself ignored some of the lessons in those stories. For example, Pabrai wrote about the ethnic Indians whose businesses were expropriated by Idi Amin, and despite this, Pabrai invested in an oil company based in Hugo Chavez's Venezuela.

Comments:

Anonymous said...
You make it sound as if superinvestors ought to be infallible. Nobody is. Under your stringent criteria, nobody could be called a superinvestor. I will not go so far as to suggest that Pabrai could yet be dubbed a superinvestor, but your reasoning eliminates the valuable learning process all investors go through.



DaveinHackensack said...
My main issue with isn't that he's made mistakes (everyone does) but his lack of any coherent investment methodology, his tendency to repeat the same mistakes, and his apparent inability to learn from them.

Consider, for example, his explanation of why he doesn't use Berkshire as a 'placeholder for cash' anymore. In Miguel's notes, Pabrai says its because some of Berkshire's businesses are not positioned to do well in the current economy. Wrong answer. The right answer is that you shouldn't use any common stock as a placeholder for cash because it doesn't maintain a stable value like cash does.

Consider also the example of Sears. Pabrai knew the problems with investing in retailers -- in fact I posted his article about that very subject here last year -- and yet he invested in Sears anyway. Why? He gave the usual bullshit reason about it being a "collection of assets managed by a master asset allocator" but Lampert himself had dismissed talk of Sears being a "hedge fund in disguise". Pabrai seems to have invested in Sears for two reasons:

1) He got his head handed to him on a series of investments where he went solo.

2) He had the comfort of the herd investing in Sears.

Also, consider the example of Compucredit. Pabrai blames them for "predatory lending"? That's a tendentious characterization of their business, and it's besides the point anyway. The company was risky because it was a highly-leveraged, subprime lender, at the tail end of a massive credit bubble. Not because it was "predatory". Pabrai's answer there is more about his desire to be admired (similar to Buffett's), and doesn't get to the heart of the risks associated with Compucredit.

DaveinHackensack
DaveinHackensack - 4 years ago
Alex,

Your gratuitous condescension aside, I had no trouble finding your link. I had trouble finding where you justified your accusation of intellectual dishonesty against me, because it wasn't there. All that's at that link is a paragraph of yours describing Pabrai's fee structure, and a link an investor letter of his. I was already well aware of Pabrai's fee structure, as he's written about it in his book and elsewhere. It also has nothing to do with any of the issues I've raised about his investing methodology.

Since you apparently have no intention of backing up your accusation against me, I won't waste any further time corresponding with you here. You can have the last word if you like.

Dave



Please click on the link attached to my original post above which will have the facts that refute the part of your first post quoted below which I took issue with.

I'll even include it again in case you can't find it:

[www.marketfolly.com]

Dave wrote:

"I haven't criticized every value investor, but I have noted that Tilson and Pabrai are much better salesmen and self-promoters than they are investors. Pabrai, at least, had a few years of impressive returns, though most of his investors (i.e., those who didn't join his first fund) are probably still under water"

Everything else you've written is meaningless to the discussion. If you don't think his verified performance for the entirety of the decade he's run his hedge fund across two different horrible markets is evidence of a great investor, then we just have a fundamental difference of opinion about what constitutes a great investor.

Thanks for your note,

Alex

You've accused me of intellectual dishonesty with no facts to back up your accusation. I'm not sure where you got that from the post I linked to above, "Mohnish Pabrai: A Super salesmen, not a super investor". Feel free to point out my intellectual dishonesty there. I am pasting the contents of that post and the first two comments on it below, for your convenience.

------------------------------------------------------------------------------------------------------------------------------------------------

Mohnish Pabrai is clearly savvy at self-promotion (as I noted elsewhere last year) and a consummate salesman, judging by the hundreds of millions of dollars of assets he's gathered. I think it's clear by now though that he's not a great investor. If it's not, these notes on Pabrai's 2009 Chicago investor meeting, compiled by Miguel Barbosa of Simoleon Sense may be instructive. Reading them, you'll be reminded that Pabrai used to use shares of Berkshire Hathaway as a "placeholder for cash", which made absolutely no sense; that he ignored his own adviceabout avoiding retailers (not to mention his alleged preference for small caps) when he invested in Sears; and that he has belatedly realized that a highly-leveraged, subprime lender (Compucredit, on which Pabrai took a 72% loss1) might not do well during a credit crunch.

A couple of years ago, I sent a copy of Pabrai's book, The Dhando Investor2, to a friend of mine who works in the Southern California office of a firm that was initially established as the family office for a Gilded Age family, and now handles the finances for other wealthy families. At the time, I figured my friend's firm might be interested in looking at Pabrai as a candidate for its stable of outside investment managers, but now I think a better role for Pabrai would be as a salesman for a wealth management firm (though perhaps one with a lower minimum asset requirement than my friend's firm).

If I were Pabrai, I would quietly approach some leading wealth management/family office firms about them absorbing Pabrai's assets under management and bringing Pabrai on to gather assets for the firm from affluent Indian Americans. Pabrai could probably add more value to his wealthy clients as an excellent salesman than as an investor.

1Pabrai also doubled down on a subprime mortgage lender, Delta Financial Corporation,after the securitization market seized up in August of 2007. He held his stake until that company went bankrupt.

2Pabrai's brief book actually contains some interesting stories about entrepreneurship (Pabrai was an IT entrepreneur before becoming a hedge fund manager), but Pabrai himself ignored some of the lessons in those stories. For example, Pabrai wrote about the ethnic Indians whose businesses were expropriated by Idi Amin, and despite this, Pabrai invested in an oil company based in Hugo Chavez's Venezuela.

Comments:

Anonymous said...
You make it sound as if superinvestors ought to be infallible. Nobody is. Under your stringent criteria, nobody could be called a superinvestor. I will not go so far as to suggest that Pabrai could yet be dubbed a superinvestor, but your reasoning eliminates the valuable learning process all investors go through.



DaveinHackensack said...
My main issue with isn't that he's made mistakes (everyone does) but his lack of any coherent investment methodology, his tendency to repeat the same mistakes, and his apparent inability to learn from them.

Consider, for example, his explanation of why he doesn't use Berkshire as a 'placeholder for cash' anymore. In Miguel's notes, Pabrai says its because some of Berkshire's businesses are not positioned to do well in the current economy. Wrong answer. The right answer is that you shouldn't use any common stock as a placeholder for cash because it doesn't maintain a stable value like cash does.

Consider also the example of Sears. Pabrai knew the problems with investing in retailers -- in fact I posted his article about that very subject here last year -- and yet he invested in Sears anyway. Why? He gave the usual bullshit reason about it being a "collection of assets managed by a master asset allocator" but Lampert himself had dismissed talk of Sears being a "hedge fund in disguise". Pabrai seems to have invested in Sears for two reasons:

1) He got his head handed to him on a series of investments where he went solo.

2) He had the comfort of the herd investing in Sears.

Also, consider the example of Compucredit. Pabrai blames them for "predatory lending"? That's a tendentious characterization of their business, and it's besides the point anyway. The company was risky because it was a highly-leveraged, subprime lender, at the tail end of a massive credit bubble. Not because it was "predatory". Pabrai's answer there is more about his desire to be admired (similar to Buffett's), and doesn't get to the heart of the risks associated with Compucredit.

DaveinHackensack
DaveinHackensack - 4 years ago
Dizzy,

I've mentioned this elsewhere before, but you ought to take a look at Marc Mayor's performance. He's not running a hedge fund, but he has been running a market neutral portfolio since '99 with some impressive audited returns.

[finance.yahoo.com]^dji+^ixic+^gspc;indicator=volume;chart;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

if TILFX, the dividend fund is run by I think Zeke Ashton and some other former Fool guys.

hedge fund marketing is loose, he's been on bloomberg where they talk specific numbers, I've heard them specifically ask and he's verified numbers on interviews with Carol Massar (3PM Bloomberg).

His annualized return is 9%, the dow is 4% over the same period, SP 1%. he has stated his goal was a CAGR of AT LEAST 15% over 3-5 years. which is what most hf guys go for.

When you figure some long-only funds have done that if not better, that is when you have issues.

Hedge funds are held to higher standards, just the way it is because there are comparable returns with less risk. There are market neutral long/short hedge funds that have done 9-11% per year so that means they have low volatility, high sharpe ratios. Market neutral is 0% market exposure, every long exposure is paired with a short. it's not my investment preference and the guys that do this style of investing are never in the media becaus its not sexy, u are really looking at max returns of 12% in a given year with that strategy but they do hold up, u dont get drawdowns of 15% w/the bulk of market neutral funds. So if you are a big investor and will pay 1.5%/20% for 9% with low vol or 9% with drawdowns of 18% and 20% in prior periods, u are going to with 9% and low vol.

If you are going to gun it a bit and be net long at around say 50% as T2 tends to be, 9% is just not going to get institutional investors excited. They'd actually prefer a Pabrai (or better like Tepper or Falcone) that will be down big but can get the triple digit returns too because at least they know the vol they are getting and allocate for that but again. Why take 9% with a 50% net long fund when you can hang with Einhorn and get 17% for actually slightly less market exposure (he runs under 50% at times). That's the universe Tilson is facing, he's raising money not against say David Winters or Yachtmann, that's a lot of retail, brokerage, and financial advisors kicking money over there. he's going against his hedge fund buddies for capital, the big institutional investors splice all of this return info across categories to figure out who to invest with.

AlexSF
AlexSF - 4 years ago
Dave,

Sigh. I guess it was too much to expect you to read page 2 of his investor letter that had his returns.

So I'll post that here for you although it looks better when it's read from the link and formatted properly on the page:

PABRAI INVESTMENT FUND 2 (US Accredited Investors) Performance Summary:DJIA NASDAQ S&P 500 PIF2
(net to investors)10/1/00 – 6/30/01 -0.2% -41.0% -14.0% +17.4%
7/1/01 – 6/30/02 -10.3% -32.7% -18.0% +35.3%
7/1/02 – 6/30/03 -0.5% +11.4% +0.3% +34.2%
7/1/03 – 6/30/04 +18.6% +26.8% +19.1% +38.7%
7/1/04 – 6/30/05 +0.7% +1.1% +6.3% +23.4%
7/1/05 – 6/30/06 +11.1% +6.5% +8.6% +15.0%
7/1/06 – 6/30/07 +23.0% +20.7% +20.6% +34.0%
7/1/07 – 6/30/08 -13.3% -11.2% -13.1% -32.4%
7/1/08 – 6/30/09 -23.0% -19.1% -26.2% -25.2%
7/1/09 – 9/30/09 +15.8% +15.9% +15.6% +42.0%
1/1/09 – 9/30/09 +13.5% +35.6% +19.3% +112.5%
Annualized +2.4% -5.3% -1.5% +16.8% Cumulative +24.2% -38.8% -13.1% +303.9%

If you believe that he only had a few impressive years (I count six out of nine) and that these returns over a nine year time span which had a couple brutal turns in it isn't enough factual evidence to disprove your claim that he's a better salesman/self-promoter than he is an investor, than I find that claim of yours intellectually dishonest (perhaps intellectually bankrupt is a better phrase). You seemed like a smart enough guy that I didn't feel the need to spell it out for you in detail and you would just look at the returns the first time. I apologize for not making myself clearer the first two times. You can have the last word by explaining to me why these returns are not indicative of a great investor because they look good from where I'm sitting and I would have loved to have been an initial investor of his in spite of the beating his fund took in 2008.

Best,

Alex

Alex,

Your gratuitous condescension aside, I had no trouble finding your link. I had trouble finding where you justified your accusation of intellectual dishonesty against me, because it wasn't there. All that's at that link is a paragraph of yours describing Pabrai's fee structure, and a link an investor letter of his. I was already well aware of Pabrai's fee structure, as he's written about it in his book and elsewhere. It also has nothing to do with any of the issues I've raised about his investing methodology.

Since you apparently have no intention of backing up your accusation against me, I won't waste any further time corresponding with you here. You can have the last word if you like.

Dave



Please click on the link attached to my original post above which will have the facts that refute the part of your first post quoted below which I took issue with.

I'll even include it again in case you can't find it:

[www.marketfolly.com]

Dave wrote:

"I haven't criticized every value investor, but I have noted that Tilson and Pabrai are much better salesmen and self-promoters than they are investors. Pabrai, at least, had a few years of impressive returns, though most of his investors (i.e., those who didn't join his first fund) are probably still under water"

Everything else you've written is meaningless to the discussion. If you don't think his verified performance for the entirety of the decade he's run his hedge fund across two different horrible markets is evidence of a great investor, then we just have a fundamental difference of opinion about what constitutes a great investor.

Thanks for your note,

Alex

You've accused me of intellectual dishonesty with no facts to back up your accusation. I'm not sure where you got that from the post I linked to above, "Mohnish Pabrai: A Super salesmen, not a super investor". Feel free to point out my intellectual dishonesty there. I am pasting the contents of that post and the first two comments on it below, for your convenience.



------------------------------------------------------------------------------------------------------------------------------------------------

Mohnish Pabrai is clearly savvy at self-promotion (as I noted elsewhere last year) and a consummate salesman, judging by the hundreds of millions of dollars of assets he's gathered. I think it's clear by now though that he's not a great investor. If it's not, these notes on Pabrai's 2009 Chicago investor meeting, compiled by Miguel Barbosa of Simoleon Sense may be instructive. Reading them, you'll be reminded that Pabrai used to use shares of Berkshire Hathaway as a "placeholder for cash", which made absolutely no sense; that he ignored his own adviceabout avoiding retailers (not to mention his alleged preference for small caps) when he invested in Sears; and that he has belatedly realized that a highly-leveraged, subprime lender (Compucredit, on which Pabrai took a 72% loss1) might not do well during a credit crunch.

A couple of years ago, I sent a copy of Pabrai's book, The Dhando Investor2, to a friend of mine who works in the Southern California office of a firm that was initially established as the family office for a Gilded Age family, and now handles the finances for other wealthy families. At the time, I figured my friend's firm might be interested in looking at Pabrai as a candidate for its stable of outside investment managers, but now I think a better role for Pabrai would be as a salesman for a wealth management firm (though perhaps one with a lower minimum asset requirement than my friend's firm).

If I were Pabrai, I would quietly approach some leading wealth management/family office firms about them absorbing Pabrai's assets under management and bringing Pabrai on to gather assets for the firm from affluent Indian Americans. Pabrai could probably add more value to his wealthy clients as an excellent salesman than as an investor.

1Pabrai also doubled down on a subprime mortgage lender, Delta Financial Corporation,after the securitization market seized up in August of 2007. He held his stake until that company went bankrupt.

2Pabrai's brief book actually contains some interesting stories about entrepreneurship (Pabrai was an IT entrepreneur before becoming a hedge fund manager), but Pabrai himself ignored some of the lessons in those stories. For example, Pabrai wrote about the ethnic Indians whose businesses were expropriated by Idi Amin, and despite this, Pabrai invested in an oil company based in Hugo Chavez's Venezuela.

Comments:

Anonymous said...
You make it sound as if superinvestors ought to be infallible. Nobody is. Under your stringent criteria, nobody could be called a superinvestor. I will not go so far as to suggest that Pabrai could yet be dubbed a superinvestor, but your reasoning eliminates the valuable learning process all investors go through.



DaveinHackensack said...
My main issue with isn't that he's made mistakes (everyone does) but his lack of any coherent investment methodology, his tendency to repeat the same mistakes, and his apparent inability to learn from them.

Consider, for example, his explanation of why he doesn't use Berkshire as a 'placeholder for cash' anymore. In Miguel's notes, Pabrai says its because some of Berkshire's businesses are not positioned to do well in the current economy. Wrong answer. The right answer is that you shouldn't use any common stock as a placeholder for cash because it doesn't maintain a stable value like cash does.

Consider also the example of Sears. Pabrai knew the problems with investing in retailers -- in fact I posted his article about that very subject here last year -- and yet he invested in Sears anyway. Why? He gave the usual bullshit reason about it being a "collection of assets managed by a master asset allocator" but Lampert himself had dismissed talk of Sears being a "hedge fund in disguise". Pabrai seems to have invested in Sears for two reasons:

1) He got his head handed to him on a series of investments where he went solo.

2) He had the comfort of the herd investing in Sears.

Also, consider the example of Compucredit. Pabrai blames them for "predatory lending"? That's a tendentious characterization of their business, and it's besides the point anyway. The company was risky because it was a highly-leveraged, subprime lender, at the tail end of a massive credit bubble. Not because it was "predatory". Pabrai's answer there is more about his desire to be admired (similar to Buffett's), and doesn't get to the heart of the risks associated with Compucredit.

xuzhu
Xuzhu - 4 years ago
it looks like that dave doesn't understand value investing at all. 

an investor should not be judged in a short span of time but rather a long period of time. value investing is a PROCESS of finding undervalued securities, which at the time of the purchase is out of favor, dirt cheap, etc and the prices could go down further. so, a value investor would have to wait probably in 2-3 yrs time for the catalyst to spell out and the price to recover. so, it's unavoidable that an investor would have periods of underperformance - in absolute/relative terms. 

your points with pabrai is valid. probably he has made a lot of mistakes by not taking heed on his advice. but great investors make a lot of mistakes. investing is a lifelong learning. you get to learn new things everyday. so when mohnish pabrai decided to change his strategy from 10x10 to 2-5-10 in terms of portfolio allocation, it does mean that he has admitted that the old strategy would no longer work in current and future environment. probably he has made a wrong decision to buy compucredit and sold it at a loss. who doesnt make a wrong decision? if you bought a stock and hold it then realizes the thesis was wrong in the first place, then it's time to sell - whether at a gain or at a loss. but it doesnt mean his PROCESS is wrong. it's just that once in a while, people makes mistakes. 

with regards to the issue whether tilson/pabrai is a salesman, that's also true. in this business, you have to be. remember when buffett was flowing with ideas but with little/no capital? he went down and presented to doctors (emdee partnership) and until he was known, he used to do prsentations and pitch his partnership. and they thought this young buffett was overly ambitious and that he would failed. there's nothing wrong with being a salesman, as long as you give back to investors the return that they deserve. 

if tilson would still have manages the 1 million today, he wouldn't be a gurufocus guru. he probably would be good, could have grown his fund to 2 million in 5 yrs (that's 20%/year) but he will never be known. if you start with a million and target to have a hundred millionin 5 yrs, could you do that by just being a good investor and picking stocks every day?no, you have to sell your fund and tell people that you can make a decent return at lesser risk. 

the thing is, you can never really be a good investor with reading a lot of books. you've got to have the emotional make-up to be one. it takes a whole lot to manage a 300mln portfolio and watch it goes down 50%, while patiently averaging down and buying more on the dips. 

Moathunter
Moathunter - 4 years ago
To lighten the spitefulness that this message board has descended into, thank you very much Wolinsky and Tilson for the interview.


Especially of interest was Tilson's frank and humble entry into value investing by managing relative's money. As did Buffett. The most passionate investors here should do the same. We may never appear on Squawk Box, but you become a much admired big fish in a tiny pond. Gratifying.

Indeed, it is said that until a person has managed their own and family money, they haven't *really* managed money and the risk management it entails (rule #1 don't lose money). In contrast, Wall Street's beta and diversification shows the lack of risk management in place beyond their own 'career risk'.
yswolinsky
Yswolinsky - 4 years ago
Whitney Tilson's T2 partners letter was recently posted on market folly here is the link

this again should settle the dispute to http://www.marketfolly.com/2010/03/whitney-tilsons-t2-partners-letter.html

BTW dizzy your comments dont make sense. John Bogle has stated that the market average is say 9.5% per year. The market average is the average return of mutual funds hedge funds etc.By laws of mathematics the average mutual or hedge fund has to underperform since they charge fees. So the average mutual fund/ hedge fund will say have a 9.5% return minus their fees. Therefore the average hedge fund likely had negative returns over the past 11 years while Tilson's fund has return 240 gross. That is very impressive Dizzy. If you want to argue about the fact I just stated please read some of John Bogle's books first who is an expert on mutual funds.

yswolinsky
Yswolinsky - 4 years ago
thanks moat for your comments
Amit Chokshi
Amit Chokshi - 4 years ago
I'd rather read John Mauldin's books over Bogle. Bogle has some good wisdom but if you listened to him you'd never invest in active mgrs and never have a chance to outperform the market. Bogle is all about index funds which for most are fine but he knows what's buttered his bread for decades and won't stray from that.

My point with Tilson again is that his annualized return of 9% since his start-Dec 2009 (i can get his letters at any point btw) is not going to cut it against his peer group. As i said in the prior comment, T2 is a hedge fund so will compete against other hedge fund classes and categories for assets. he runs a 50% net long hedge fund so with that level of market exposure, he should be posting numbers in the low to mid teens. Einhorn, Third Point, etc are 15-19% annualized vs T2's 9% despite similar net exposures.

In contrast, Lee Ainslie's Maverick Capital has annualized 15% since inception (600+% cumulative but annualzied return once u get to 3+ years is what matters most) with super low vol. Maverick is net long but generally pretty low market exposure.

There are market neutral long/short hedge funds that have done 9-12% annualized with low drawdowns so sophisticated, institutional investors say with T2, ok we have a guy with 9% annualized with a 50% net long book who has a lot of the exact same ideas he copies (he does not originate them, he copies them) from Einhorn, Pershing Square, etc and those funds have more originality and 2x the returns of T2 on an annualized basis. So why would we invest in T2 when we can get the real deal with the other funds?

T2 could do better if they dumped BRK, AXP and actually invested in stuff that joe blow is not investing in because they could define a real edge in small/mid caps. $200MM can do a lot in a hedge fund. Seriously, if u are a WEB fan and want to emulate him, u think WEB running $200MM would touch any of these companies like BRK or AXP? Please, he's be taking over some mills or factories on $50MM-$100MM market cap companies and using any cash flow to buy up other companies.

Then on the flip side, T2 is doing the same thing as a HOST of market neutral funds that do 8-12% but have no significant drawdowns. So your question as an instiuttional investor is a) if i take a 20% drawdown i want to have higher annualized returns. So with greenlight, they've taken hits but they annualized 17-19%. then b) i want some liquidity then, if you are only 9%, i dont want -20% years, so why go with T2 when there are a host of other similarly sized market neutral funds that will do the same with lower volatility so the investor gets 9% annualized with half the drawdown.

That's the key point with T2, it's about half the annualized returns of many of its peers in long-biased value hedge funds while having more downside risk than market neutral funds that have similar returns. So that's why T2 is in no-man's land. Plus the benchmark institutional investors use are like Credit Suisse Hedge Fund Index, Barclay's Hedge Fund Index, etc which have all done better than the SP500.
yswolinsky
Yswolinsky - 4 years ago
well then there are many in his peer group who had huge negative returns according to the laws of mathematics. So he did pretty darn good I would much rather have been in his hedge fund the past ten years than almost any other hedge fund or mutual fund.

But I dont have time to post anymore on this topic but I think people see your comments are not correct.
yswolinsky
Yswolinsky - 4 years ago
BTW dizzy I did not mean any offense, you are very bright I just think you are being unfair to Tilson.

Anyway I dont have time to post further but let the readers decide for themselves.

and thanks for your comments
Amit Chokshi
Amit Chokshi - 4 years ago
What my ratings are in any of my comments has nothing to do with me being right or wrong. Just look at the healthcare debate over the past year. Positive/negative surveys are more reflective of an uninformed crowd than whether the topic in question is accurate or not. I dont have it with me but I'll look for the CS/Tremont Hedge Fund Index and post the numbers. You might have been better with T2 than other mutual funds (not sure though, most guys here and I bet you would prob put moeny with guys like Berkowitz right? how'd he do vs Tilson, how did Marty Whitman do, etc basically these gurus on the site). but the CS/Tremont HFI will show that the annualized returns for hedge funds as a group will be pretty good over the same time period.
Amit Chokshi
Amit Chokshi - 4 years ago
no worries re offending me, i am direct, u can be too, if i say something someone feels is stupid, they can say that and it's all good.
yswolinsky
Yswolinsky - 4 years ago
One last thing didnt Mauldin write the millennium wave?
LwC
LwC - 4 years ago
FWIW here is an analysis of hedge fund performance. I don't remember where I found this link, but if it was posted previously by a contributor to GuruFocus that's where the credit should go.

HSBC Private Bank

Hedge Weekly N°6

Investment Funds Performance Review

Alternative Investment Group

Week of Monday 01 Feb to Friday 05 Feb 2010

http://dealbreaker.com/_old/images/thumbs/HedgeWeekly2010_No06.pdf

kfh227
Kfh227 premium member - 4 years ago


KFH you can be a great investor and diversified. Look at Dreman or Tweedy Browne, or Paul Sonkin.


Imagine the performance if they only picked there 10 best ideas!

I was willing to go 100% WFC when it was at $14 and if I did I would have doubled my money in 6 months. It's that kind of willingness that is value investing.
yswolinsky
Yswolinsky - 4 years ago
value investing does not equal high concentration. Many of the best value investors both present and former did not have highly concentrated portfolios. If I had bought XLF at 7 with all my assets instead of only a few percent I would have made a killing, but that is not value investing. WFC was practically insolvent in earl 2009, you could have lost everything.

Many great value investors diversify and for good reason. Look what would have happened if you put all your money in enron lehman fannie etc. Toyota is a great example of the fact that it is impossible to know the future and it pays to diversify at least somewhat. You could have read every single information about Toyota and not known about its current problems.
ustaad
Ustaad - 4 years ago
With all due respect, there's an important point being overlooked here. The past decade hasn't been the best time to differentiate between value investors on the basis of performance. To some extent, this decade has been about macro themes and less about stock picking.

The last 2-3 years in particular, returns were factor of positioning relative to macro trends. Hence we saw comments to the effect that macro outlook plays a part in value investing. I don't necessarily agree with that completely. Solid value investing (based on calculation of margin of safety and accurate scenario analysis) might result in higher volatility and a longer time horizon for investments to work out during certain times, but not necessarily a complete failure of value investing as a discipline. In some ways, if the analysis was correct than a 50 cent dollar should revert to a dollar over time (or at least 50 cents). If the events of past few years eroded the margin of safety, then there wasn't a margin of safety to begin with.

becomingbuffett
Becomingbuffett premium member - 3 years ago
Good stuff here! Thank you very much for sharing. As I'm still a novice and trying to learn everything I can, I found Tilson's advice (how he learned about investing) particularly helpful.

I attended my first Value Investing Congress last month. It was excellent. I got to chat with Whitney briefly one afternoon. He's very genuine and it's obvious that he's serious about sharing what he's learned, teaching, etc. (And his record as an investor is solid, in my opinion. Definitely better than my broker whose pitiful performance led me to start managing my own money. I can thank him for that, at least.)

Several of the presenters walked through their methodology and then gave at least one investment that met their criteria. These presentations were great--like taking a class. Then there were a few that were pure fluff. Maybe they didn't want to reveal any secrets. (Wrong approach, in my opinion.) Maybe they didn't want to get "pinned down"--go on record. Pabrai's presentation was probably the least informative of all of them. (I read Dhando Investor before the conference. I was looking forward to his presentation. I was disappointed.) He talked about checklists, without sharing his, and wouldn't give any specific recommendations, instead referring the audience to stocks recommended by other presenters.

Anyway, my take on two investors discussed here, for what it's worth.

Thanks again, Jacob!

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