Q: When will you close the funds?
A: Well, the larger the set of assets you manage, the more difficult it gets to put it to work. So if we make five percent bets with a portfolio of 20 positions, that would mean that with one billion dollars, we would be putting $50 million into one idea. If I don't want to do the filings and everything else associated with going over five percent, I'm limited to companies over one billion dollars in market cap; and practically speaking, probably just to those businesses with several billion in market cap. So when you start looking at, let's say, three billion dollar and up companies, you're limiting your universe. And then you start looking at how deeply undervalued those companies are; those are the only ones I'm interested in.
So as you move up the market caps, you have more analyst coverage. You have more efficiency, and unless you have dislocation, you tend not to get extreme pricing. It just gets harder. My take is that at that point, we probably want to focus on doing the best job we can with the assets in house. That's the reason I have that number.
Q: A couple of years ago, at a value investing conference for Pinnacle Airlines, you made a compelling case for investment. It came out of the category of low-risk, high-uncertainty. You had a number of stocks that because of the market's perception about the volatility in the industry, were categorized in that group, and their prices fluctuated as a result of that. But you made a good case for Pinnacle being an airline for which there were different attributes that didn't necessarily fit with other airlines. I'm just curious if your investment thesis has changed at all with Pinnacle. And if it has, how?
And also, I have just a general request. Would you mind sharing with us some of your perspectives from your lunches with Mr. Buffett and Mr. Munger, and what some of your takeaways were -- things that maybe you didn't know prior to those meetings? A: Okay, good questions. Regarding Pinnacle, it's an existing holding, so we don't like to talk about it too much. I did speak about it at the conference. If you look at the business in terms of its cash flows, etc., you will find that it has at a very low multiple to earnings and such. So, any of the value metrics are going to come across as very cheap.
There's a specific point on the checklist that Pinnacle failed, and I made that point a mandatory one for the future. So if we have a failure on that question, I'll just take a pass on the investment. The question has to do with win-win for the ecosystem. What I want to do is to invest in businesses that have business models that are win-win across the board. Pinnacle is a business that is, somewhat, I would say, antagonistic with its customers. The airline business, in general, is a terrible business to be in. But Pinnacle has a "cost plus" model. It makes money even if its customers lose. And that, generally speaking, puts it at odds with its customer.
So for example, if Delta has a big customer, and Northwest has a big customer, but they're hemorrhaging cash like crazy while Pinnacle makes a huge amount of money, there are two issues. One is that they don't have too many customers, so each customer has a lot of clout. Also, the customer is generally unhappy and grumpy. Those things have long-term negative implications. In the case of Pinnacle, it will probably work out just fine. But I'll give you another example.
Let's say the Wynn Las Vegas or the Wynn Resort comes on the market extremely cheap. Sometime in the past, I probably would have been interested because Wynn has great positioning and great branding. But at the core, there's a win-lose proposition between it and its customers. I would also say that with liquor companies, you get a win-lose proposition, and with tobacco companies, you get a win-lose proposition. So for many of these businesses, even though it's probably highly likely that an investment will work out, I just say, "Hey, why go there? Why not invest in the businesses on the other end that are win-wins across the board. And so if I had had the checklist 10 years ago, I wouldn't have made the Pinnacle investment because of that win-lose attribute.
And you asked about the long-term. Well it was a wonderful year to be able to sit down with Mr. Buffett and Mr. Munger. The lunch with Charlie Munger went longer than the meeting with Buffett. It went, I think, more than three-and-a-quarter hours. I feel that we live in very unusual times, with both of them alive and in good health, and both not that far away from me, in terms of driving or flying. And one of them was willing to take a bribe to sit down for a meal, and the second one sat down for a meal without a bribe. So that was great.
So my take was, "Well, my heroes are alive, and there's an opportunity to meet them and interact with them, and who knows how long that opportunity will be available?" And I was able to share that with my family at the Buffett lunch. Just Harina, my wife, came with me for the Charlie Munger lunch. We had a great time with both men. And I would say that, obviously, the Buffett lunch was worth every penny and probably more. In fact, since then, people have paid three times what I paid. And the price will probably keep going higher.
There were a number of things we discussed at both lunches. At the Buffett lunch, I interviewed everyone who attended afterwards, and we covered 54 different topics. We covered quite a wide range of things. Warren was asked who he would like to have lunch with, if he could have lunch with anyone. So he said, "I'd like to have lunch with Sophia Loren." Before that, he said, "I'd like to have lunch with Isaac Newton." And then he said, "No, no, forget about Isaac Newton. I want to have lunch with Sophia Loren."
I was surprised at Charlie because, as those of you who attended the Berkshire meetings know, Charlie comes across as having this hard edge, if you will. But I found him extremely warm, very gracious. I just felt like I was having lunch with my grandfather. I met Charlie at a time when Pabrai Funds was down a lot, and I had a number of questions for him related to his experience in '73 and '74 (he exited the fund business in '75), when his funds went down a lot. I just asked what was happening with him at the time. I found it very insightful to be able to go through that.
I still look back on different things that came up at the lunches, like when Buffett told both my daughters that the most important decision they'll make in their lives is who they decide to marry. I hope they both remember that at the right time. It was a great experience. I thought both meetings were wonderful. But I haven't published notes on these meetings. Many of the questions and much of the discussions, I would say, are family confidential, and we should probably keep it that way.
Harina is here today. I enjoyed talking with her about which lunch was better. In fact, the whole reason we had lunch with Charlie Munger was that when we met with Warren, I told Warren, "Harina is very happy to be here, but her true love in life is Charlie Munger." I could just see Warren's competitive spirit come up. He said, "Really?" So I said, "Yeah." So he said, "Well, I'm going to arrange for you guys to meet Charlie for lunch, and then after that, you'll know how mistaken you are." I thought he was kidding about that, but two days later, I got an e-mail from him saying that he had sent an email to Charlie that said, "I met these guys for the Glide Lunch, and we had a great time. But Mohnish's wife, Harina, is under the misconception that you are more interesting than I am (talk about bad taste). To put this matter to rest, I've asked them to meet you for lunch." So after the lunch, Harina and I talked about which lunch was more interesting; and actually, I enjoyed the Charlie Munger lunch more. Harina enjoyed the Buffett lunch more. So the way we thought it would be flipped around.
Q: Do you still hold Berkshire Hathaway as a cash proxy, and why or why not?
A: Yeah, I've held Berkshire Hathaway from time to time as a cash proxy, when it's been available well below intrinsic value. These days, it's probably below intrinsic value.
Q: I want to thank you for inviting us Mohnish. Have you had a chance to analyze your redemptions? Maybe you could share with us why the investors that did redeem did so -- a run from Pabrai Funds or a run from the market, or maybe they needed the cash? Maybe you could share that with us.
A: Yeah, some redemptions we have every year are hardship redemptions; people need the cash for a variety of reasons. Last year, a lot of people saw their net worth go down quite significantly. So I know that there were many instances of people redeeming because they just needed liquidity. We also probably had significantly more redemptions that were just based on the thought "I want to be out of here; and not so much out of Pabrai Funds, but out of any investments." Those people wanted to go to cash. I would say that the overwhelming majority of the redemptions were of that nature. And in fact, I remember some of the conversations I had with folks during which they basically said, "We are in for a tough period for a long time, and we don't think this thing is going anywhere for a while." This stance is similar to many of the sentiments Tom shared.
I find a couple of things ironic. One is that 2009 will probably end up being the best year Pabrai Funds has ever had, and 2009 is a year when we've had the highest unemployment rates. We've had lots of trouble in the economy, and we may have more trouble coming. One wouldn't naturally associate a bad economy with success. But that's what generally happens with investment. You tend to have the most gains when people are the most pessimistic. And I see the exact same pattern with subscriptions and redemptions. Our subscriptions were very high in 2006 and 2007, but currently, even in the last six months to one year or so, they're very low. The folks who did invest six months, nine months, a year ago have done extremely well. So on both fronts, people tend to be completely off on where they stand.
So the lesson is something that Warren talked about quite a bit. He said that the best year for the market since he has been in it was 1954, and that was a year during which the economy was in terrible shape. He had the best performance he's ever had in his life in 1954. So again, in the investment world, things tend to kind of run counter to what might be conventional wisdom. I remember a number of conversations I had with investors who were redeeming who were very, very confident that they were getting out well before a lot more trouble could come. That was their take. But that's human nature.
Also, it's very hard to forecast where things will go. If you had asked me in January, February, March, April, May what we would do this year, I would not have forecast the numbers we had. My forecast would not have been anywhere close to reality -- we've done much better than even I would have guessed we could do. And that's the nature of investing. You can't nail these things down. So that's why you should stay in for the long-term and take it from there.
