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10 Questions to Mohnish Pabrai

July 01, 2007

GuruFocus readers are given an opportunity by Mr. Mohnish Pabrai to ask up to 10 questions. Please respond this thread with the most important questions you want to ask. We will select 10 out of them and send to Mr. Pabrai.

We appreciate very much the opportunity that Mohnish Pabrai gives us, but "no questions on present or recent past holdings".

So far we have received some very good questions. These are the highlights:


1) Is there a range of market cap stocks that you feel most comfortable with?

2) To get the lights out returns you have accomplished what is your feeling on "shorting" and leverage ( and if you use leverage what is the maximum amount you are comfortable with)

3) How important to you is ROE?


Could you briefly provide some valuation techniques you use? Which method you favor?
a) Reproduction Costs of assets Earnings PV/Enterprise Value
b) DCF

I have read that if you find you are looking for excel while valuing, you take a pass. What’s your thought process when you value a company?


Love your second book Dhandho Investor! Wanted to buy a copy of your first book but now only selling for $$$, do you think you will reprint?

Also I noticed low p/e and high return on capital is important i.e. Joel Greenblatt style..
what do you think of the peg ratio?


What exactly are your reasons for avoiding the P&C business? There are some very well run companies in this arena and Buffett has profited from the business. Does it extend beyond P&C to all types of insurance; health, auto, reinsurance etc.?


Where do you get some of your investment ideas from?


Do you speak to management to judge their quality, or do you use just their performance numbers? If you speak to them, what do you ask, and if you just use the numbers, which ones do you find most important?


Currently you are handling less than 1 Billion dollars, as every fund manager knows size becomes an anchor to performance, as your fund increases in size, how will your approach change in stock selection? Will you move to larger companies like Buffett or will you "diversify" ,moving away from a concentrated portfolio?

Please follow this thread with your questions. We better ask the questions that we cannot find answers from his books or interviews because we are limited to only 10. We just learned that he won the eBay bid of lunch with Warren Buffett. It will be interesting to know what questions he will ask to Warren Buffett. We will send these questions to Mr. Pabrai after we select the most important ones.

Rating: 3.0/5 (18 votes)


Ssinghfsu - 12 years ago    Report SPAM
Do you maintain statistics such as the beta of your portfolio, Sharpe and Treynor ratios, etc., that you may be able to provide to readers?

Besides you, who else makes investment decisions in your hedge fund? Although you seem much too young, is there a "succession team" in place? Is there a point at which you will close your fund to new money, given the inverse correlation between size and perfomance?
Tkervin - 12 years ago    Report SPAM
What has been your biggest investment mistake? Not just a stock that did not perform as expected but a process or method error? (Loved Dhandho Investor!)
David Pinsen
David Pinsen - 12 years ago    Report SPAM
I would ask Mr. Pabrai to expand on the distinction he made in his book "The Dhando Investor" between "risk" and "uncertainty". He wrote about investing in "low-risk, high-uncertainty" situations. What are some guidelines for distinguishing whether it's risk or merely uncertainty that has depressed a stock's price?
Gangstarr - 12 years ago    Report SPAM
1. In Mosaic, one of your essay provides commentary on the danger of investing in retail companies because their business models are transparent and any franchise or niche is quickly eroded by competitors. Any comment on the returns one might expect from Walmart? A number of Gurus believe it is undervalued as evidenced by their investments and commentary.

2. How will your investing framework change as the amount of money contained in your funds increases?
Zippbrain - 12 years ago    Report SPAM
I pose this question to you because you are the worlds best authority when it comes to predicting the future of business markets as the intrinsic value method of stock selection is nothing more than assigning probabilities to future events. Over the span of your investing career you have had the luxury of a continuously expanding GDP both in the USA and abroad which essentially served as a tailwind to your results. Just as some day the universe may cease to expand, do you see a limit the expansion of worldwide GDP, and if so what will that mean for equity markets and other investments in the end
Cnarayan - 12 years ago    Report SPAM
Mr. Pabrai, you ran a successful IT consulting firm in the late 1990's which you subsequently sold. It was more or less around that time you started Pabrai funds. I know that you read a great deal on Mr. Warren Buffett and others but were there any specific academic courses that you studied before you started Pabrai funds that made your investing fundamentals so strong? Also please throw some light on how you started Pabrai funds...in that how did you meet and convince your clients to invest $1 million to start your fund during the first year?
516632 - 12 years ago    Report SPAM
Mr Pabrai,

how has Phil Fisher influenced your investment philosophy?

What would be your favorite long-term holdings, if you had the change to purchase them below 'intrinsic value'.

Vooch - 12 years ago    Report SPAM
In pages 24-27 of "Mosaic: Perspectives On Investing", you come right out and say, "Do Not Buy Retailers".

Some of today's retailers are priced very attractively today (eg. HD and WMT). The fundamentals of these companies look great and I see them as compelling reasons to buy. However, you didn't like retailers because of the transparency of the business. To me, it seems hard to duplicate a HD or WMT, but I could be wrong.

It's been 5 years since your book was written and several retailer stocks have come down in price because of apathy among other things.

Then, in "The Dhandho Investor", you evaluate BBBY (albeit not worth buying at the time), which implies you at least consider some retailers.

My question is, "Do you still have the same conviction today to say, 'Do Not Buy Retailers' or has your opinion changed? Will you ever buy a retailer?"

Disclaimer: HD, LOW, and WMT are over 50% of my portfolio.
Armeetofo - 12 years ago    Report SPAM
when to sell?
Rsfishel premium member - 12 years ago
What do you do with an investment which has performed unexpectedly or poorly? For example, you recently bought freight car america (RAIl) and the other day the company warned about the coming quarter. What information do you find most useful in this situation in deciding to sit tight, to sell or to buy more? When do you decide its time to throw in the towel before losing more of your original investment? For me, finding good companies to buy is usually not that hard; it's knowing what to do with them after you own them that's the hard part. Thanks for your advice - you are my favorite guru! - Robert S. Fishel
Danielw - 12 years ago    Report SPAM

1. Why aren't you invested in the base metals producers--many of which have very low PEs, high ROE, pristine balance sheets and so on? At these prices, you don't seem to have to make a macro call on the price of the commodities and in fact some, like TCK, will do just as good if not better in a correction (given their large cash positions).

2. The rise of index funds has made it more likely to find value in companies currently "non-indexed"--has the rise of so many value funds made it more likely to find value in companies that won't pop up on the usual screens?

I see a lot of the best value investors doing a lot of exciting things, but more and more it seems they are finding value in companies that look expensive on a TTM basis while cheap on the basis of their assets and earnings power going forward.

(For reference, I am thinking here specifically of the Third Avenue funds, which are loading up on "expensive" REOC's in Japan, grain handlers and so on. They're the best examples of this balance-sheet style investing, I think, even though it's nothing new for them...)

3. Do you have a checklist with regards to "special situation" investing that you run through personally and don't mind sharing? Is Buffett's advice that we shouldn't own a stock for 10 minutes if we aren't willing to own it for 10 years relevant here?

Thanks in advance for any answers. I'll be picking up your book upon my return to the states, and am looking forward to reading it.
Cmstahl premium member - 12 years ago
What are the characteristic traits to avoid, if you want to be a successful investor? Which traits should you be looking for?
Itsrahulshah - 12 years ago    Report SPAM
Market prices for a lot of stocks are quite sensitive to their terminal values. What is your take on this? Would be great if you could also share with us the kind of growth rates you consider in our terminal value assumptions?
Lemon999 - 12 years ago    Report SPAM
Can you give us your definition for special situations? And what is the break down of your portfolio?
Pywong - 12 years ago    Report SPAM
Are you exposed to any companies that are involved in the subprime loans?
Andres.Reibel - 12 years ago    Report SPAM
1st Question to Warren Buffett: I know you usually do not comment on current stock market levels. Nonetheless, you need to have a general assumption of the market level at any time. What are the factors (e.g. P/E ratio, portfolio turnover, IPOs, general newspaper sentiment, employment figures, capacity utilization etc.) that tell you that we reached unjustifiable high/low market levels. Graham states in "The Intelligent Investor" that one should refrain from buying in bull markets where lunacy took over control. Do you agree or will you keep buying undervalued stocks under high market conditions.

2nd Question: Every industry has certain key figures (e.g. finding costs in the oil industry). What key figures do you look at in the following industries:

Food and Beverages (Coke and Candy), Insurance, Financial Services (e.g. Wells Fargo), Industrials (e.g. Iscar)
Gokou3 - 12 years ago    Report SPAM
What do you find to be the biggest challenge in launching an investment fund: finding investors, dealing with regulations, or others?
JLAnnello - 12 years ago    Report SPAM
I think the Buffett Partnership model is a fantastic one to follow for those investing <500 million in assets. You tend to agree I believe.

My Question: Buffett invested in three distinct categories- Generals, Workouts, and Controls. I know you tend to avoid the latter, but relating to Generals and Workouts- how do you feel those types of investments apply to today's market? Grahamian Bargains, which can see huge returns with small amounts of capital, seem to be scarce, and M&A is so heavily covered that "workouts" now may be different than in Buffett's era.

Do you have any particular comments on investing in "Generals" and "Workouts" as they apply to investing today?
Pesaque - 12 years ago    Report SPAM
Mr. Pabrai how do you calculate intrinsic value? Do you always use a 30% discount rate.
Munger - 12 years ago    Report SPAM
Personally, my highest return investments have come from buying mediocre businesses at very inexpensive valuations. The cheapness was easy to find. In other words, very traditional valuation tools shouted "this company's equity is for sale."

My question - Would you say that in your experience, your best investments have been derived from some obscure "hidden" asset value you find in an investment or from some tradtional valuation measures?
Jay - 12 years ago    Report SPAM
I read "The Dhandho Investor", an excellent book! I want to know the same thing as # 3 above-Davinhackensack. Could you expand more on how you decide between risk and uncertainty (low risk but uncertain investments). I believe that this is the key new idea you bring to investing-at least in this book. I have studied investing extensively, but I have never read this thought before. Thanks.

ebal brian barry
Ebal brian barry - 12 years ago    Report SPAM
I am a student and still in my final year of secondary school. I am just learning about investing and would like to ask you to recommend me on which investment books to purchase. Thanks
Eagle2x premium member - 12 years ago
If you were starting the U.S. tax code from scratch, what would it look like?
David Pinsen
David Pinsen - 12 years ago    Report SPAM
Pabrai answered Musto's question ("Where do you get your investment ideas") on pp. 174-177 of "The Dhando Investor". Pabrai mentioned sources including the OID, the Magic Formula website, Value Line, etc.
Smileyguy - 12 years ago    Report SPAM
I noticed that many of the stocks you have purchased have a very high Price/Tangible Book Value. Benjamin Grahmim looked for companies with low P/TBV that paid dividends but your selections fall outside of this strategy. Please comment on this and if P/TBV and dividends comes into play at all during your selection process.
Rjlull1 - 12 years ago    Report SPAM
If your philosophy is so value oriented, how can you justify spending 650k for lunch with Warren Buffett?
Magher - 12 years ago    Report SPAM
How does your investment philosophy differ from Warren Buffett’s and Charlie Munger’s and why?
Armeetofo - 12 years ago    Report SPAM

i have the same question as yours
Snowskater12 - 12 years ago    Report SPAM
After reading "The Dhandho Investor" I have a few general questions:

1) What suggestions (or more examples) can you give GuruFocus readers on the art of selling, which I consider a very difficult part of investing for a value investor.

2) Warren Buffet stated that his ideal holding period is 'forever,' and that 20 investments in a lifetime are more than enough for any individual investor. Do you agree with these statements, or should one be more flexible in their investing strategy?

3) When using the "heads I win, tails I don’t lose much" philosophy how important is a company’s book value, and debt situation?... or do you look more at the possible outcomes in terms of the company’s operations and business strategy?

Visible - 12 years ago    Report SPAM
Your investment company will obviously benefit from your lunch with Buffett (publicity, taking key clients along, the halo effect), but what do you hope to learn - what burning questions do you have for Warren?

Enjoy the experience, it is sure to be great and "worth your investment."
Jbnadal - 12 years ago    Report SPAM
As a follower of Warren Buffett you insist in buying into companies with a "moat"; nevertheless the kind of companies you tend to invest in do not appear to have wide moats as generally described by Warren Buffett and reflected in his holdings like Coca Cola, Gillette or American Express. Could you please expand on your definition of a moat and contast it with Warren's definition?
Deepthought - 12 years ago    Report SPAM
Warren Buffett is looking for a younger successor to take over picking stocks for Berkshire Hathaway. Will you be applying for the job over lunch? If so, WB said that the biggest challenge for many successful managers will be to ‘scale up’ from managing smaller amounts of money. How will you attempt to answer this?
Highterm - 12 years ago    Report SPAM
What 'tools' and information sources do you use to conduct your research.

For example, do you have a Bloomberg terminal or similar service. What websites do you regularly use. Do you use software or websites to screen for stocks.

In short, how do you go about narrowing down the universe of stocks to those few that you do serious investigations into.

Bones02892 - 12 years ago    Report SPAM
Mr. Pabrai:

As Buffett commented about holding investments over many years, you keep the taxman out of your pocket when you don't sell, even if the price approaches IV. In Dhando Investor, you mention several examples where intrinsic value and ROI were increasing within the co's, yet you still exited your position because the price was approaching intrinsic value. Aside from having better opportunities elsewhere, this is perplexing. If the mgmt is continually enhancing the company's ability to compound its value (more cheese on your growing pizza slice(s)), why wouldn't you hold your position, especially in a strong market demand environment for that company's products and/or services? To me, it would seem more consistent for you to continue to hold the investment if return on shareholder equity is increasing over the years and only sell when Mr. Market is offering you an absurd price for your holdings. Your comments would be appreciated. Thanks.
Rjlull1 - 12 years ago    Report SPAM
ravinsu typed, "Simple question to Rjlull1 and his/her fans......."

I'll answer your questions for 200k and I'll throw in an Egg Mcmuffin too.
Petrasm - 12 years ago    Report SPAM
i) As your mentor or the other guru, do you allow for a possibility of taking over a cash/flow rich business and restarting your investment activity from a smaller base but on your own?

ii) Value investing approach thrives on natural human brain defficiency and dissemination of ideas will not do any harm. Why your shareholder meeting notes from 2001 were removed from gurufocus?

iii) I heard that you like working alone. Is there a possibility that you will sometimes let in somebody as a pupil in the future?

iv) Do you find it difficult to work on your own without any double checks / complementary mind (Buffett - Munger) giving up some perspective? Maybe you have such a partner?

Looking forward for your new book arrival! As I remember RAIL could keep on warning for sometime... but this does not automatically mean lower value
Inv66 - 12 years ago    Report SPAM
Thank you for the opportunity to ask you questions. Most people rarely have access to successful investors and even when we do, many investors closely guard their accumulated wisdom. What you are doing is very admirable.

I would like to learn more about your research process. When you identify a prospective investment, what steps do you take before reaching the ultimate buy/sell decision? Does your process differ for investments in and outside your circle of competence?

Gurufocus premium member - 12 years ago
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