cmlber

Unless 30 year interest rates are 2.3% for the next decade or two... Your alternative to stocks right now (other than cash) is to guarantee destruction of about 1/3 of your principal in real terms over 30 years if you're in the top tax bracket. If that doesn't change then even if margins fell this probably wouldn't be a bubble and if margins stay here stocks are way undervalued. Who knows if that changes, although it seems crazy to think it wouldn't.

On a more serious note, although I may get flamed for saying this, I think shorting these 'safe', 'bond-like' consumer stocks like Hershey, Nestle and their ilk is a tempting opportunity. Why? Nestle has grown low/mid single digits for a very long time and can pass through inflation (if we ever see it again) to consumers. It's yielding a little over 4% right now with absolutely no leverage. In a world with 2.5% fixed 30 year treasury yields, why on earth would you not rather own Nestle? Now you may say you think its crazy to lend money at 2.5% for 30 years (I agree), but in a world where that's the "safe" place to put money, I would say Nestle looks pretty cheap as a "safe" investment.

I am confused too because he was buying http://www.sec.gov/cgi-bin/own-disp?action=getowner&CIK=0001549575 He was buying in July and September but this does not seem to be reflected on the 13F. Anyone have any insight on why this looks this way?? My guess is just different reporting entities.. The Form 4 includes all shares controlled by Pabrai (i.e. includes the insurance sub Dhandho holdings, and other accrs). The 13F includes only Dalal Street. He has a rule that he has communicated to his investors that he won't invest more than 10% of the partnerships capital at original cost basis in any one security. He mentioned this in response to one of the questions he got at the annual meeting in Chicago. So I don't believe he can buy more without breaking that rule.

Of course, nobody can calculate with precision, but if two companies have a significant difference in undervaluation, it may be advantageous to bet more on one than the other. The difference may not be so obvious between your best and second best ideas, but perhaps between your best and sixth best ideas. This is the point I'm making. I'm a believer in concentrating, but one stock seems to go too far in my opinion. I think there's a reason Charlie Munger says 3-4 stocks is enough but never quite goes so far as to say you only need a one stock portfolio. Concentrating on your best few ideas makes a lot of sense. If you think something is a 2.5-3.5x, and you think something else is a 2-3x, it's hard to say which one is truly "better" on its own, you should probably own both. Sure if you have one amazing idea thats a 5x and your next best idea has 20% upside it makes sense to concentrate on only your best idea. But practically speaking, you won't find yourself in that position. Comparing your best idea to your sixth best you might find yourself there. The point I'm making is that it's true that over the long run, on average, the larger the discount to intrinsic value, the better your idea will perform. But if you are making so few bets (one every year or two), you don't get the luxury of thinking about averages because your sample size will be so small.

The whole premise of investing in only your best idea because it has 100% upside while your second best only has 50% upside has some major flaws. First, its impossible to know with such precision how undervalued something is, so knowing in advance what your "best" idea is will generally be very hard. Second, you haven't given any thought to the opportunity cost of not holding your second best idea when the market closes the discount on the second best idea at a faster rate than the first best idea. After all, the whole reason something is cheap is because of an inefficiency, why is it necessarily true that something that is "more undervalued" will always perform better than something that's less undervalued? The answer is, it isn't. On average that may be true, but if you take one bet every year or two you will have a very small sample size, so it's probably a bad idea to think about averages.

He has said it in public speaking appearances at universities. I've never seen proof of it anywhere (I doubt you can see proof of it without investing), but if I was considering investing in his fund, the first thing I would ask is "Can you show me the proof that you've done 25% for 20 years", and if he couldn't show it to me, I wouldn't invest. So I assume since he manages $700m, a lot of smart people have fact checked him. Also, even if none of his investors were smart enough to ask for audited performance numbers, it would be incredibly risky (and stupid) to lie about it, because even if you don't get fact checked before an investor puts money in, making a material, false statement like that is a recipe for a lawsuit. Any investor that lost money in the fund could sue him personally for their losses, after the fact, by claiming he made false representations about his previous performance.

Picking one 10 year period (which I'm sure must be the worst ten year period over his 20 year track record given how poorly he performed during the crisis) where he outperformed by about 3% gross and saying he's not a great investor is ridiculous. Likewise, if you picked the 10 year period before the one Barron's mentioned (which must have been amazing to average 25% if he did around 11% in the last 10 years) and said he's a better investor then Warren Buffett you would be foolish. It's always smarter to use the longest available time frame when evaluating a money manager.