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10 Questions to Mohnish Pabrai – The Answers

July 13, 2007


Ccyork - 8 years ago
Fanatstic! Thanks for answering these questions, Mr. Pabrai.

"The mistakes with Satyam were two-fold. One, I invested under $10,000 in it, when I should have put atleast 10x that number into it as I had about $1 Million in investable assets. Second, I should have sold well before Rs. 7000 – when it reached intrinsic value."

I read: You can make as much by taking a substantial stake in a low-risk situation as you can by taking many small stakes in high-risk situations.

Why not opt for the low-risk alternative?

-- ccyork

Vooch - 8 years ago
Mr. Pabrai,

Thank you very much for answering my question!!!

- Vooch

Ndl11 - 8 years ago
Pabrai is my favorite guru as well!!!! He also "gives back", to his credit, not only to the average investor but he bgives to other charities as well! Not even Warren Buffett is not as generous with sharing his knowledge like Mr. Pabrai!!
Kfh227 premium member - 8 years ago
Referring to Satyam, there is something inspirational when someone says they held to long when selling 10% from the top. It's nice to see honesty and not bragging.

As an aside:

The more I read, the more I realize I have lots to learn.

Retail aside 1:

In terms of retail, let’s take two extremes. Wal-Mart seems to be very efficient, especially with inventory controls. Then again, Home Depot has serious inventory problems. Their computers rarely know what is stocked where. So, Lowes is simply better here. But a third corporation could always come with a Wal-Mart like inventory system, creating lower prices to the customer and before you know it, the big two home improvement places are Lowes and ABC corp. HD will be in trouble. I think this is not going to happen since I don’t see any ABC Corp on the horizon, but the concept holds.

Retail aside 2:

Another comment on retail. My favorite is TJX. They are a conglomerate of retail stores. If one is weak, they can sell it off. The good models will just expand over time. Some stores like Marshalls and TJ Maxx even stock the same goods, so having two nearby don't cannibalize themselves.

Thank You Mr. Pabrai! It’s wonderful to see a guru help out those trying to learn more.

Billytickets - 8 years ago
Mr pabrai is a class act .His secretary said he enjoyed an email I sent him and he had the class to have her personally respond.

FYI: If you are going to purchase a small cap "following" a guy like Pabrai is your best bet. To expect to have the expertise to do this on your own is not as easy as Mohnish makes it This man is a wealth of wisdom and his tempermant is excellent. Buying at or near a stocks 52 week low is another of his methods as well as searching gurufocus
Buffetteer17 premium member - 8 years ago
The main lesson I learned from Mr. Pabrai's book and answers to questions is to buy lower and sell lower. I've been mistakenly trying to emulate Buffett's current methodology of buying great businesses for a reasonable price and holding a long, long time. There's nothing wrong with that of course. But for an individual small-scale investor like myself, it does seem better to look for the 50 cent dollars-on-sale, take the short ride to 90 cent dollars and move on. I also have to be more patient (who of us doesn't!?) and learn that it is okay to sit on some cash and wait for the next 50 cent dollar.

This revelation has already had an influence on my activities. I bought Garmin when I figured it to be extremely undervalued a couple of years ago. It is quite analogous to Satyam Computer Services, great management, growing revenues, etc. It is also analogous in that it's price has now exceeded my fair value estimate. I didn't make the mistake of betting too little---I put 45% of my portfolio into it---but I was on the verge of making the mistake of holding too long. I'm now selling off. The business is doing fine, so I'm waiting for long term cap gains rates on shares and options that were bought less than a year ago.

BTW, thanks also to gurufocus for the RAIL tip. After due diligence I bought some 30 cent dollars there.

Billytickets - 8 years ago
wise post buffeeteer17. Buffett holdson not only because of his large positions but because he knows that the"governmental deferred taxes loan" and the float is beneficial over time.Like someone else pointed out many "bargains" like Berkshire itself was a huge mistake. KO WFC JNJ AXP BUD PG have brand names which could not be "started from scratch".You did great on garmin buying it and are "exiting" at just the right time IMO.Small caps have outperformed large for last 8 years and while there are always bargains. large caps of consumer staples are the "safe haven". Glad to see you with JNJ.its great vallue now. peace
David Pinsen
David Pinsen - 8 years ago
It was nice of Mr. Pabrai to respond to my question, though I'm not sure how helpful that particular example from his book will be for anyone trying to replicate what he does, since stocks selling for 1/4 of their book value are rare. But I think I understand better now how Pabrai differentiates between risk and uncertainty: he does a ton of homework on the particular situation to find out.

One recent example is HNR. I doubt I'm the only one who looked at this Pabrai holding when it was trading under $10 and thought: Chavez = raving socialist = HNR gets nationalized. To me, Chavez equaled risk, not just uncertainty, but Pabrai apparently did his homework on this one, and figured (correctly, so far) that Chavez wasn't stupid enough to scare off all the competent oil industry people; he just wanted to squeeze them for a bigger piece of the business.

Pabrai's advice to invest in "low-risk, high-uncertainty" businesses is sage, but homework and execution are everything. It's like Tiger Woods telling you to keep your left arm straight on your drives.
Highterm - 8 years ago
With regards to valuation, why does Pabrai choose 10x fcf? Would this change if, say, interest rates moved up or down significantly, or inflation took off etc, etc....

Also, what does he mean by excess capital? is that just cash and investments?
Eonibm - 8 years ago
Mohnish says above that he almost bought one retailer, but then didn't because it was "tad over 50% off, so [he] passed". I thought his strategy was to buy 50% off, or a greater discount if possible. What was it that made him pass given the price met his major criterion. Was there something else about the investment he didn't like? (I guess we'd have to pose this question directly to Mohnish).
Buffetteer17 premium member - 8 years ago
ravinsu: Sometimes companies are able to finance their growth out of cash flow without any borrowing. Examples, RAIL, CSCO, MSFT, EBAY, GRMN, etc. These companies all produce so much net cash, they have no debt and money left over after spending for expansion. Shouldn't the WACC for such companies be lower than for ones that borrow to finance growth? Take RAIL for example (being discussed in another thread), with a likely long term growth rate of 4-6%/year. They have $15/share in net cash and a substantial cash flow, so they don't need to borrow at all. To value the company, I use a WACC of 10% which is somewhat is based on what I think I could make nearly risk free plus a small premium. Thus we have a multiplier of 1/(WACC-G) = 1/(0.1-0.05) = 20.
Recortes - 8 years ago
The Dhandho is still shipping to my home, so I have to wait to understand better the methodology. But seemingly one of the most important factors for Pabrai is to buy 50% off the intrinsic value.

According to that, do you think it would be a Pabrai's way just to collect the valuation of Morningstar and buy when the stock price is 50% off the fair value?. I know it sounds simple.. what guys do you think?.

Billytickets - 8 years ago
yes ravinsu you are correct about that.My formula I use assumes a much lower percentage of return that I "expect" to get. the lower price you buy something to intrinsic value the higher your return"should be". My problem is unlike almost everyone else here including most of the gurus I have very"narrow" parameters. Great discussion guys
Oogum - 8 years ago
I like Pabrai and he certainly has an incredible track record. But I found his answer to the "biggest mistake" question frustrating, self-serving and, in the end, sort of lame. He has had some investments where he really blew the analysis (Seitel and Exide are good examples). Grossly overvaluing XIDE by using faulty plan projections (when the operating business was utterly predictable and simple to value even with lead volatility) would have been more interesting to read about than his "not buying enough" of a 100 bagger. He's a great investor and has proved he can outperform over a long time period. But I don't see why he had to cop out on us by not telling us about times when his valuation process has failed him.
Myth465 - 8 years ago
Financially I think that was his biggest mistake. If he had put 10% into that position like he does now imagine the return he would have made. We are talking about a stock that went up 175 times, 100,000 * 175 is a lot of money. I'm guessing this really was his biggest mistake.
Gokou3 - 8 years ago
Wonderful article! There's something that I don't understand though and it would be nice if someone can answer my question. Mr. Pabrai mentioned in his answer to Question #2 that "it should be obvious if something is a bargain or not within a few minutes without Excel." However, for Q3 his analysis of Frontline shipper seems to require way more than a few minutes of time. (e.g. finding out that "There were about 400 VLCCs globally at the time") So, I am a little confused here... Pabrai iterates over and over in Dhandho that finding bargains could be quite simple and yet from his analyses it seems to me that the effort required could be quite time consuming.

M8eyboy - 8 years ago
The thing I don't understand about the Frontline example is that; could they have actually sold the ships had they needed to, and who would have bought them? Surely there is a risk that, since there was 'severe distress' in the oil shipping industry, nobody would have wanted them. Ultimately that wasn't tested by the looks of things because of a cyclical recovery. But the risk was there...
David Pinsen
David Pinsen - 8 years ago

That's a good point. Essentially, you are saying that the difference between uncertainty and true risk can only only be determined definitively in hindsight, which is probably true.
Myth465 - 8 years ago
I believe the financial statement analysis is simple. I would venture to guess that pabrai spends the balk of his time understanding the business and mentally playing out the odds. I believe he is staying don't spend weeks with excel doing regression analysis with pivot tables and the like.
Usi - 8 years ago
The definition of a cheap stock being 10-15 times FCF (plus any spare cash/ investments). And then he wants a 50% discount to this valuation - this is equivalent to a yield of 13.3-20% of FCF/ EV. Pretty hard to find stocks with this criteria. However I just did a screen and found 73 stocks that meet the criteria.

Hopefully there will be 1 good stock out the 73 that I can pick.

Has anyone read his book: Mosaic: Perspectives on Investing? It's over $300 per copy to buy it :)
Buffetteer17 premium member - 8 years ago
There's a story about John von Neumann teaching a math class at MIT. He was filling the black board with formulae and at one point he wrote a complex equation while saying " is obvious that..." Then he frowned, paused, cupped his chin and silently paced back and forth for 30 minutes. Then he smiled, said "Yes! it is obvious" and went back to writing formulae.
Axel - 8 years ago
Write please his full valuation formula

10-15 times FCF ?? It seems to me it very simply.

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