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Bram de Haas
Bram de Haas
Articles (388)  | Author's Website |

Mohnish Pabrai Thoughts on Investing

Pabrai shares his knowledge about investing and views on current markets

May 26, 2019 | About:

Mohnish Pabrai (Trades, Portfolio) is managing partner of Pabrai Investment Funds. He started out in 1999 with $1 million and has grown it beyond $800 million in assets under management. Pabrai visited the Trinity Student Managed Fund at Trinity Business School in Dublin, Ireland, on Feb. 21. The talk was recently released on May 23. Pabrai is a very interesting and unconventional money manager. Here are a few of his key thoughts expressed in this talk.

Investing in Japan

Culturally shareholders are not put first. Employees are first. Other stakeholders second. Shareholders come after that. Many trade below cash. If you look at net assets they seem attractive. The issue is that the company’s are not willing to let go of the cash. From Pabrai’s perspective, the cash is an illusion. The companies need to be willing to let the cash come out and he thinks it won’t.

Investing in South Korea

The last 30 years the KOSPI (South Korean exchange) has appreciated about 2% per year. South Korea has demonstrated tremendous economic growth. But this hasn’t translated into widespread equity appreciation. This is one of the most fertile hunting grounds for good stock ideas right now. Plenty of stuff trading at 3x earnings.

Stock market valuation

With equity markets, Pabrai believes we can’t really tell where we are unless we are at extremes. In Japan, you can tell you are in a cheap market. In Korea, you can tell you are at a cheap market. Most markets I don’t see signals either way.

Pabrai has not made an investment in the U.S. in the last four years. He doesn’t find anything there. He is not sure if the future is bad but in other places it is easier to fish.

Areas Pabrai had trouble in:

Levered institutions gave Pabrai problems (his fund has had a few picks go to zero): He has learned to stay away from these because for some reason he doesn’t understand them well enough.

If you look at Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B), at least a third of its investments didn’t turn out so well. If you weight it by dollar spent, the record is great. They have been right on the ones that count. Berkshire bought a lot of retailers most of which did not work out. Retail is tough.

If you look at levered institutions like banks and insurance companies Warren Buffett (Trades, Portfolio) has a close to an unblemished record. He hit it out of the park on that front.

Warren Buffett (Trades, Portfolio) has also done extremely well in Media. He has done really well in packaged food companies.

The lesson being we all have our circle of competence and Pabrai's doesn't include levered institutions.

Lessons from Warren Buffett (Trades, Portfolio) and Munger

Having patience is very difficult in this age of flashing screens. Prices are changing all the time. Change in business takes years.

Fidelity, a major broker, its best clients in performance were either dead or they forgot they had the account. Investing activity is more likely to hurt you than help you.

Charlie Munger (Trades, Portfolio) has been reading Barron’s for 50 years. And in 2003 he bought a stock from Barron’s for the first time. He got 25.000 stock tips bought one.

The willingness and patience to wait for a very fat pitch is very important.

Stay inside your circle of competence

All John Orriega, a billionaire friend of Charlie Munger (Trades, Portfolio)'s has ever done is invest in real estate around one campus. You don’t have to know a lot in investing if you stay in your circle of competence.

What does success look like for you?

Pabrai doesn’t focus on that. He just puts one foot in front of the other. It is part of the Buddhist philosophy to not focus on the reward. Instead focus on the effort, not a particular endpoint.

Pabrai wants to end up leaving planet earth with zero. He wants to enjoy compounding wealth but also give it away at the same time.

About fund fee structures

Pabrai had never worked in the financial industry before. He knew a bit about mutual funds and liked the rules of the Buffett partnerships. He took the Buffett rules to a lawyer and told him to put it into a modern package.

What Pabrai learned between then and now is that cloning is a very powerful model. For some reasons people don’t put it in practice very often. Warren Buffett (Trades, Portfolio) charged no management fees. He only charged a performance fee after the first 6%. Pabrai copied that model. After ⅘ years he realized it gave him a competitive advantage very few people could copy.

If you have $100 million dollars under management you are guaranteed $1 million or $2 million in fees per year. They spend that money on people on the payroll.

But investing is not a team sport. It is an individual pursuit. In general, if you have more people your results will suffer. This is a bizarre industry. 80% of the people in this industry subtract value. At Pabrai funds there are no employees. There are very little expenses. When the business model works well, it works very well. If you make $17 million/year you can have a few lean years.

Why should you give your money to an investment manager that isn’t already wealthy? If you are in your 40s as a great investor you should already be wealthy. One should need the 1% fee. Charging a management fee will make it harder to raise money.

Low risk and high uncertainty

Stock markets hate uncertainty. They want predictable growing earnings quarter by quarter. But the business world is messy. Things don’t work that way. Markets have an irrational expectation of smooth business. If there’s any hiccup the business gets taken out back and shot.

Disclosure: No positions.
 

About the author:

Bram de Haas
Bram de Haas is managing editor of The Special Situations Report and Founder of Starshot Capital B.V.

Visit Bram de Haas's Website


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