One of the first actions value investor Mohnish Pabrai (Trades, Portfolio) took when the Covid-19 pandemic started to shake global stock markets in March of this year was to review his investment portfolio.
In a Q&A session at Boston College at the beginning of October, Pabrai explained that he immediately began to underwrite his positions to try and determine how badly the pandemic would impact them. "I was trying to understand what kind of impacts it would have on the existing portfolio," the value investor told his audience.
"The thing is, capitalism is very brutal, and in the best of times, most businesses are very fragile," he went on to explain. If businesses are fragile at the best of times, they became even more so when the economy takes a turn for the worse.
Pabrai explained that he "owned some real estate companies in India," and their sales were likely to go down, but he did not have any concern about the businesses' stability because they had strong balance sheets. "I said 'yeah, that's not a problem for them to handle'... So I was not concerned about those businesses," Pabrai explained.
However, he continued on to note that he became quite concerned about the outlook for one company in the portfolio, Fiat Chrysler (FCAU, Financial). Specifically, he stated:
"The car business has so much operating leverage, when you shut down a car plant, it means you take that whole thing in reverse. I was very concerned about how this was going to affect them and how long it was going to last. So, we completely exited the position and I exited at a significant discount to where it was trading before the pandemic... The uncertainty levels were way too high and I had seen that business have trouble in the past."
Pabrai said he would not do anything differently the second time around. As he was selling Fiat, other opportunities presented themselves. He said his investment firm completed two new investments during the March sell-off, and they have done "very well."
Based on his past interviews and lectures, it seems the value investor does not like to trade too much, so his decision to sell Fiat Chrysler is notable. It is clear that Pabrai didn't want to be holding on to a company with such an uncertain outlook. He has said that he only invests in businesses that he understands and likes to pass on companies with highly uncertain outlooks.
So, from a completely unbiased perspective, his decision to sell the automaker makes a lot of sense, even though holding on and waiting for the rebound could have proved lucrative if its weak balance sheet didn't do too much damage.
In hindsight, the company has survived and its stock price has done well since March. However, this is only with the benefit of hindsight - we have to remember no one could have predicted the future at the height of the market meltdown in March. Against that backdrop, it would have made much more sense to exit the stock.
Opportunity Cost
There's also something to be said here for exiting uncertain and losing positions in favor of buying companies that appear to offer better risk-reward ratios. Pabrai sold a company he was no longer optimistic about in favor of two businesses he thought could produce better returns.
Analyzing your positions with an unbiased eye critically, and reversing course if the investment case no longer stacks up, is a great skill to have. It is one that all successful investors need to be able to develop and be aware of. Analyzing the opportunity cost of holding on to one investment in favor of selling up and moving onto something with a more attractive return profile requires emotional intelligence and a willingness to view losses objectively.
Disclosure: The author owns no share mentioned.
Read more here:
- Mohnish Pabrai's 100-Bagger Scuttlebutts
- Mohnish Pabrai: On Growing Pies and Changing With the Times
- Warren Buffett and Seth Klarman's Advice on Developing a Plan and Sticking With it
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
