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New Mohnish Pabrai Interview


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https://sumzero.com/headlines/business_services/FCAU/411-pabrai-advice-for-value-investors

 

In case you haven't seen this. Some interesting stuff, though anyone familiar with him won't find any surprises.

 

The one thing that did make me raise my eyebrows a little is him saying that he takes a 33% performance fee above the 6% hurdle - I'd thought it was 20.  I appreciate the zero management fee, but 33%, gosh.

 

Anyway, this is not intended as another bout of Pabrai-bashing, I think he has a number of talents, but I'm just not sure I'd pay anybody that.

 

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https://sumzero.com/headlines/business_services/FCAU/411-pabrai-advice-for-value-investors

 

In case you haven't seen this. Some interesting stuff, though anyone familiar with him won't find any surprises.

 

The one thing that did make me raise my eyebrows a little is him saying that he takes a 33% performance fee above the 6% hurdle - I'd thought it was 20.  I appreciate the zero management fee, but 33%, gosh.

 

Anyway, this is not intended as another bout of Pabrai-bashing, I think he has a number of talents, but I'm just not sure I'd pay anybody that.

 

33% - that’s a lot of money to pay in a good year. Probably just better to stick with index funds. or just by BRK.B instead. The old man works for chump change.

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In Buffett's day, one couldn't buy an index fund. Not sure if Munger would agree with me here, but a better approach would be to have out-performance against a predetermined index fund as the hurdle with some type of fee claw back provision with no management fee. I think Pabrai's fee is probably more fair than the vast majority of hedge funds though.

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So, FWIW some time back I had done a spreadsheet for net returns to investor with SP500 historical returns under different fee scenarios. 

 

It is attached below.  Maybe some will find it useful.  The big takeway is that the Buffett model only pays for the manager when you are generating serious alpha. 

 

Of course, the traditional hedge fund structure is egregiously expensive for the investor. 

 

fee_comparison.thumb.PNG.c233ba5772b1fbaca10f9cef99844777.PNG

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The Snowball discusses the reason for the 6% hurdle rate for the early Buffett partnerships.  At the time the long term average risk free rate was 6%, so he didn't want to charge people a fee for what they could get without taking any risk.  At the time he invested in a lot of special situations and workouts, so I'm not sure using an index (Dow Jones?) for the hurdle makes as much sense.

 

I haven't been investing long enough to have ever seen a 6% risk free rate, so this is a foreign concept to me.  For this reason, I think Pabrai using 6% is very generous to his investors. 

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Thanks, these comparisons are always interesting to see.

 

There's a closed-end fund in the UK, which has no management fee, and a 15% performance fee over a 10% cumulative hurdle rate per annum.  It launched a little over 3 years ago, and the NAV is 20% down from launch, so you've got a good lot of free performance if it turns itself around.

 

Thanks also JRM for the Snowball explanation (I've forgotten most of it...).  6% seems not unreasonable to me though, as I believe it's the long-term expected real return rate from equities (from Siegel, or Dimson perhaps, I think).  And obviously we've got some inflation.

 

Ultimately though, the definition of reasonable charges is a very subjective thing.

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In Buffett's day, one couldn't buy an index fund. Not sure if Munger would agree with me here, but a better approach would be to have out-performance against a predetermined index fund as the hurdle with some type of fee claw back provision with no management fee. I think Pabrai's fee is probably more fair than the vast majority of hedge funds though.

I've argued for something similar to this. The question I have is, what is a good timeframe to judge a long-term investment manager? 5 years? 10?

 

Let's say it's 5 years.

 

If I were to pay the "perfect" manager - i.e. someone to make all my investment decisions for me, I argue that the compensation should be a performance fee of X% for all gains over the 5 year treasury. No management fee.

 

The treasury is truly risk-free. Allocating to S&P index entails risk (equities could be overpriced, you could buy a basket of bonds or real estate instead, for example, and this is part of the investment manager's job of allocating capital to risky assets).

 

Which is not a huge hurdle. The 5-year is aprox 2.75% these days.

 

 

 

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With the Buffett scenario, he also guaranteed his original partners against loss. That says a lot.

 

If one compares to just the 6%, if a manager simply invests index funds, they can still earn 1% by simply matching the historical averages- (10%-6%)*.25 = 1%.

 

I just think a manager should actually add value or not be paid or be paid something close to minimum wage otherwise. People in minimum wage jobs add value. If a manager doesn't outperform after fees then they actually reduce value...so minimum wage is generous.  They should also be paid on the upside and downside so even if they lose money (let's say market is down 40% and they're down 15%) they should still be rewarded.

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"Zero percent of our current assets are in the US. Which has never happened in the 19 years of running the fund.  We always had a very large portion of assets in the US. I would have never guessed that we would get to the point where we would be at zero - but here I am. "

 

Pretty amazing.

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"Zero percent of our current assets are in the US. Which has never happened in the 19 years of running the fund.  We always had a very large portion of assets in the US. I would have never guessed that we would get to the point where we would be at zero - but here I am. "

 

Pretty amazing.

 

I guess he's pretending FCAU is a Dutch company.

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it will be interesting what his performance will be for this year. A couple of stocks he is invested in has gone down 50%. Although they have gone 5x on the upside prior to this year.

 

Agree. The Indian stocks RAIN and KRBL are down 50+% this year. Fiat is also down some 20%. Question is does he have some others that are up 2-5x to balance out the result? History of the fund is very large upside AND downside. Over long period of times that averages out to a return of approx 15%/year after fees - which is excellent but requires the ability to stomach the volatility. Let's see what happens over the next couple of years after he had an outstanding 2017.

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So, FWIW some time back I had done a spreadsheet for net returns to investor with SP500 historical returns under different fee scenarios. 

 

It is attached below.  Maybe some will find it useful.  The big takeway is that the Buffett model only pays for the manager when you are generating serious alpha. 

 

Of course, the traditional hedge fund structure is egregiously expensive for the investor.

 

The Buffett fee column is incorrect. 

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Very useful table - can you please share the original spreadsheet? Also - would like to see the returns with Vanguard or Schwab SP500 funds.

 

So, FWIW some time back I had done a spreadsheet for net returns to investor with SP500 historical returns under different fee scenarios. 

 

It is attached below.  Maybe some will find it useful.  The big takeway is that the Buffett model only pays for the manager when you are generating serious alpha. 

 

Of course, the traditional hedge fund structure is egregiously expensive for the investor.

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