Mohnish Pabrai (Trades, Portfolio) is managing partner of Pabrai Investment Funds. The company started in 1999 with $1 million, and it has grown to $800 million. Pabrai visited the Guanghua School of Management at Peking University in China, and his talk was released June 14. Pabrai is a very interesting (dressed in shorts here) and unconventional money manager. This is a creative talk where he shared two key lessons with the students, with a lot of humor. Here are the two key lessons.
1. Investing is about the future
Pabrai shared a competition he's created with his good friend Guy Spier. He doesn't like Guy Spier's Mastercard (MA, Financial) investment and thinks he should sell it. Therefore, he challenged him to a race pitting Mastercard against Sunteck Realty (BOM:512179) to see who would have better returns over 12 years.
Mastercard has performed in amazing fashion since Spier owned it and has a history of great shareholder returns. Pabrai shared charts comparing the two, and Sunteck Realty looks like a real dog.
Pabrai doesn't believe that Mastercard, which trades at 43x earnings, will do well in the future precisely because of its rich valuation. The market has bid up this excellent performer and now it needs to perform at a very high level to live up to that expectation.
Pabrai doesn't think Sunteck is as great a business. It doesn't have the same moat. It doesn't have as great management. However, he thinks it will handily beat Mastercard on shareholder returns. Why? Because it starts at half the price-earnings valuation and is trading at only 2x book value. Valuation of your investments matters a great deal.
2. You need an edge in the market
Pabrai also has a race going with an individual that will remain anonymous. This person pitched Motherson Sumi Systems (BOM:517334) to Pabrai. Motherson Sumi has great management, which Pabrai met. In fact, Pabrai has met 200 CEOs in India and thinks this CEO is the best among them. It is a great company with a great model, he said. It acquires businesses under very specific and unique conditions and only at the request of OEM automakers. After it takes over an auto part plant, it typically makes only a few changes: It always fires current management and installs a young insider as new management. The problem with this business is that its management gives optimistic guidance (which it admittedly often meets). However, the market is not unaware that this is a great business.
Pabrai instead owns 9.99% of Rain Industries (BOM:500339) and pitted it against Motherson. This company is in the aluminum supply chain business, which is an oligopoly industry. Pabrai bought it at about 1x forward earnings. It trades at about 6.6x earnings.
It is worth listening to the full talk even if you have watched Pabrai lectures on other occasions. This is a new format and presentation that I haven't seen him do before.
Disclosure: No positions.
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