In seeking out the advice of professional stockpickers, it’s best to avoid the so-called closet indexers.
Portfolio managers that fit that bill hold 40 or more stocks –Â many hold hundreds –Â with each comprising a small percentage of the portfolio. They collect active-management fees for performance that, at best, matches the index.
That’s not the way hedge fund manager Mohnish Pabrai (Trades, Portfolio) rolls. The Indian-born Pabrai, who runs the $700 million-asset Pabrai Investment Funds, puts big money behind his convictions. In the investment world, that translates to holding a small basket of stocks and watching them closely.
“I have heard [Warren Buffett (Trades, Portfolio)’s business partner] Charlie Munger (Trades, Portfolio) more than once say that a well-diversified portfolio needs four stocks,” says Pabrai, in a phone interview from his office in Irvine, Calif.
Pabrai’s portfolios aren’t quite that concentrated. But the value hound is OK with buying a stock that makes up 10% of his fund house’s assets, and even letting it run a bit higher than that. He takes a go-anywhere approach, seeing opportunities ranging from the U.S. to South Korea.
A former information technology consultant, Pabrai is a serious student of Warren Buffett (Trades, Portfolio)’s approach to investing. In 2008, he and a friend, value investor Guy Spier, paid $650,000 in a charity auction to have a two-and-a-half-hour lunch with their investment idol at a famous New York steakhouse.
It’s hard to know the full extent of Pabrai’s performance over the years. By law, as a hedge fund manager, he is not allowed to publish or disclose numbers for noninvestors, including inquiring reporters, since that constitutes marketing the fund. According to BarclayHedge, an Iowa-based fund-tracking firm, Pabrai Investment Fund 3 returned an annualized 9.68% over the past 10 years through Oct. 31 net of fees, outpacing the total return of the Standard & Poor’s 500 index by about 1.5% a year. That said, the fund has sharply underperformed the broader stock market this year.
When asked about this underperformance, he replied, “I think it is an irrelevant data point. There is nothing intelligent that one can say about short periods like 10 months. I never make investments with any thought to what will happen in a few months or even a year.”
At least investors don’t get charged for periods of poor performance. Unlike most hedge fund managers, the long-only investor doesn’t charge a flat management fee of 2% on top of performance fees. He just charges 25% on gains made over 6%.
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