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Mohnish Pabrai Q&A at Indiana University.


MattR
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Hello,

Mohnish recently had a great Q&A at Indiana University:

 

Lots of great insights and ideas there.  I summarized the whole thing for those who like to read rather than listen: https://roiss.substack.com/p/takeaways-from-mohnish-pabrais-q

 

 

I personally really enjoyed his outline and the search for cinch companies. I find it very hard to find cinch companies that are not expensive. Google, Costco, Apple and Microsoft are all great but they rightfully demand a premium. Anyone has found great companies who are cheap?

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4 hours ago, Spekulatius said:

I guess “cinches” have replaced the “spawners”.

I really enjoy his talks and his ideas, but as an investment manager he seems to find a new hammer every few months and now wants to nail every stock with it. There are some stocks in his portfolio like Shinoken that seem great, but looking at his track record, chances are high that he sells it before it becomes a great business.

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Humble opinion:

I admire Pabrai's generosity and am thankful for the amazing yet simple investing lessons he has taught over the years. But sometimes, I think he shares a little too much and unwittingly drills those ideas into his head; "I am a cheapskate", "P/E 1 or 2", "I'm a spawner guy now". He admires Nick Sleep a lot and one of Nick Sleep's weapons was a conscientious awareness of not pounding dogma into his own head. Heck even terms like "value investor", "growth investor", "microcap investor" are ideologies and dogmas that may eventually slice one in the throat. Ultimately, one is just looking to do intelligent things and navigate this amazing puzzle capitalism has provided us with. 

 

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45 minutes ago, n.r98 said:

Humble opinion:

I admire Pabrai's generosity and am thankful for the amazing yet simple investing lessons he has taught over the years. But sometimes, I think he shares a little too much and unwittingly drills those ideas into his head; "I am a cheapskate", "P/E 1 or 2", "I'm a spawner guy now". He admires Nick Sleep a lot and one of Nick Sleep's weapons was a conscientious awareness of not pounding dogma into his own head. Heck even terms like "value investor", "growth investor", "microcap investor" are ideologies and dogmas that may eventually slice one in the throat. Ultimately, one is just looking to do intelligent things and navigate this amazing puzzle capitalism has provided us with. 

 

That is a great point. I recently heard a great talk from Robert Sapolsky, a behavioral biologist, that we like to think in buckets because it is easier -  he gives several examples of people who lived in buckets despite being several of the most respected scientist of the 20th century. Everyone has the tendency to live in a bucket, and it is incredibly hard to break out of it.

That is what I think ultimately makes Warren Buffet so successful. There were times he bought silver, where he bought cigar-buts, where he bought compounder and where he bought growth. But one has to work against the natural tendency.

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I applaud his decision to abandon the insurance company as there is nothing wrong with changing your mind if your initial analysis was wrong but I'm curious what analysis he did to form a holding company for insurance?

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30 minutes ago, wescobrk said:

I applaud his decision to abandon the insurance company as there is nothing wrong with changing your mind if your initial analysis was wrong but I'm curious what analysis he did to form a holding company for insurance?

That I think was the strangest decision of all. He bought it and a few days later he sold it, no idea why -  he said he realized it won't work out.

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7 hours ago, MattR said:

That I think was the strangest decision of all. He bought it and a few days later he sold it, no idea why -  he said he realized it won't work out.

From what I understand, he sold it because he wanted to use the float like Warren does to make investment and other purchases. He may not have known that in most states there are regulatory laws that prohibit insurance companies from making "riskier" purchases with their float including public securities.  I believe his insurance company was based out of Louisiana where he could not make use the float the way he wanted to. Nebraska is one of the few states in the country where insurance companies can buy public securities with their float. This is probably influenced by the fact that Warren / Berkshire are located there. 

I think people are pretty harsh judges on Mohnish. I think he does a great job sharing his methodology and I am grateful for all he puts out into the universe so I can learn from it. He said in one of his recent talks. There are 1000 ways to mecca. He's just following his. We all make our own investing decisions. 

 

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4 hours ago, Longnose said:

From what I understand, he sold it because he wanted to use the float like Warren does to make investment and other purchases. He may not have known that in most states there are regulatory laws that prohibit insurance companies from making "riskier" purchases with their float including public securities.  I believe his insurance company was based out of Louisiana where he could not make use the float the way he wanted to. Nebraska is one of the few states in the country where insurance companies can buy public securities with their float. This is probably influenced by the fact that Warren / Berkshire are located there. 

I think people are pretty harsh judges on Mohnish. I think he does a great job sharing his methodology and I am grateful for all he puts out into the universe so I can learn from it. He said in one of his recent talks. There are 1000 ways to mecca. He's just following his. We all make our own investing decisions. 

 

It looks like it was a decision based on a more basic level of (mis)understanding. Insurers are regulated at the state level but the risk-based formula used for the regulatory assessment of portfolio's (or float's) safety is standardized through NAIC's model (formula and levels of regulatory intervention). This is kind of basic knowledge before one would commit 150M for the purchase of a US-based insurer.  i guess it would be similar to buying a regional bank and then being surprised that capital and liquidity ratios need to be met as a going concern when aiming to manage the asset side of the portfolio.

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3 hours ago, Cigarbutt said:

It looks like it was a decision based on a more basic level of (mis)understanding. Insurers are regulated at the state level but the risk-based formula used for the regulatory assessment of portfolio's (or float's) safety is standardized through NAIC's model (formula and levels of regulatory intervention). This is kind of basic knowledge before one would commit 150M for the purchase of a US-based insurer.  i guess it would be similar to buying a regional bank and then being surprised that capital and liquidity ratios need to be met as a going concern when aiming to manage the asset side of the portfolio.

Yeah, before commiting so much money, one would assume to at least have a very basic understanding.

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8 hours ago, Cigarbutt said:

It looks like it was a decision based on a more basic level of (mis)understanding. Insurers are regulated at the state level but the risk-based formula used for the regulatory assessment of portfolio's (or float's) safety is standardized through NAIC's model (formula and levels of regulatory intervention). This is kind of basic knowledge before one would commit 150M for the purchase of a US-based insurer.  i guess it would be similar to buying a regional bank and then being surprised that capital and liquidity ratios need to be met as a going concern when aiming to manage the asset side of the portfolio.

There is nothing wrong with changing your mind of course, but $150M isn’t exactly small change nor is buying an entire company usually an easy to reverse decision, so I think this episode reflects very badly on how much he knows about what he buys or owns.

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Some of his gimmicks at the top of my head:

"Heads I win, tails I don't lose very much"

"Checklist"

"Cloners"

"Cannibals"

"Spawners"

"Chinches" 

Probably throw in there "compound by 27%" too if you wanted.

Now, compare this to Buffett. If you watch a speech of his from the last couple of years or 10 years ago or 30 years ago, he basically says the same things, over and over. Though he was fearful during covid for sure.

 

 

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^For those interested into the Stonetrust 'story', here are some references that may help in providing answers to questions asked here.

It's not clear what has happened since Mr. Chou has acquired the company.

TL;DR version: The insurer, at the relevant time period, was a small player in a tough industry (workers' comp) and, when acquired by Dhando Holdings, 30M was added to surplus and the investment profile of float changed significantly (increased stock exposure, up to a maximum area as suggested by RBC-based indicators). It's hard to grow profitably in a commoditized market and regulators/credit rating agencies will tend to focus on non-conventional players. In 2016, AMBest did put a negative outlook on the business.

Insurance is simple but not easy.

Stonetrust.profile.DT.pdf (stonetrustinsurance.com)

Stonetrust examination report as of December 31 2016 Final Version_0.pdf (nebraska.gov)

PressReleaseWintaaiStonetrustOctober2017.pdf (stonetrustinsurance.com)

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Buffett warned many times in his annual letters that insurance is not an easy business. And he pointed out that Berkshire's insurance businesses are very unique in many ways including an off-the-charts brilliant CEO Ajit Jain leading them. In fact Berkshire did poorly in reinsurance until Ajit took over and created tremendous value. 

It is surprising that Pabrai didn't heed Buffett's advice. Just because it worked for geniuses like Ajit and Warren, it doesn't mean it works for others. 

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44 minutes ago, Munger_Disciple said:

Just because it worked for geniuses like Ajit and Warren, it doesn't mean it works for others. 

Just for fun here, it's interesting to read what Mr. Buffett included in the 1977 AR, under "Insurance Underwriting":

Chairman's Letter - 1977 (berkshirehathaway.com)

There were a lot of trials and errors and of course the Geico acquisition was a calculated risk which required a careful "handling" of regulators.

In the latter part of the section, there's a reference to Cypress Insurance, a workers comp, recently acquired then. In a move that is relevant for the short term ownership of Stonetrust and the discomfort with regulators around 2015-6, Cypress had to deal with the regulators concerning an unusually large purchase of Apple stock in November 2016. The regulator's limit was largely surpassed (10% of excess admitted assets, so by about by 2.5x). Answer from the person knowing by heart to two decimal places the expenses incurred when manually distributing newspapers decades earlier: Oups, we promise we won't do it again, in the future. Since then the Apple stake has been multiplied by 4-5 (just on price appreciation).

From the: REPORT OF EXAMINATION OF THE CYPRESS INSURANCE COMPANY AS OF DECEMBER 31, 2016 note 1:

"On November 28, 2016, the Company purchased 681 thousand shares of Apple, Inc. stock for a total cost of $75.9 million. This purchased exceeded the limitations prescribed by California Insurance Code (CIC) Section 1198, which states in part that “excess funds investments shall not be made in purchases of or loans upon shares of the capital stock of any one corporation in an amount exceeding 10 percent of the excess of the admitted assets of the investing insurer over the liabilities and required reserves of such insurer.” At the time of purchase, the Apple, Inc. stock exceeded the limitations by approximately $45.4 million, pursuant to CIC Section 1198. Upon the request of the Company, the California Department of Insurance allowed for the admittance of the excess investment of Apple, Inc. stock; however, it is recommended that the Company implement procedures to ensure future compliance with CIC Section 1198. During the course of the examination, the Company agreed to the CDI recommendation and will implement procedures to ensure compliance with CIC Section 1198."   (my bolds)

---) Back to the sponsored Q&A sessions

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I mean prudence sneezes at the mention of leverage but which investor would not want 1.enormous amounts of 2. Limited recourse leverage 3. available for long periods of time? It’s a massive carry trade when coupled with someone who has a significant edge in profitably using the implied negative or low cost of that capital (as Buffett has been doing for 50 odd years). Mohnish may have been unsuccessful at it but atleast he tried and put himself in a position to be able to afford it. 

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On 4/21/2021 at 7:24 AM, stahleyp said:

Some of his gimmicks at the top of my head:

"Heads I win, tails I don't lose very much"

"Checklist"

"Cloners"

"Cannibals"

"Spawners"

"Chinches" 

Probably throw in there "compound by 27%" too if you wanted.

Now, compare this to Buffett. If you watch a speech of his from the last couple of years or 10 years ago or 30 years ago, he basically says the same things, over and over. Though he was fearful during covid for sure.

 

 

Growing pies (i own growth too, even while practicing value investing)

Discounted pies  (crappy position, but cheap)

Heavily Discounted pies (very crappy position, but cheap)

Compounders 

Hidden moats (only I understand the moat)

Growth engine

4-5X in 5 years.  (don't bail out on me)

8-10x in 6-8 years (please don't bail out on me)

 

 

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On 4/21/2021 at 7:24 PM, stahleyp said:

Some of his gimmicks at the top of my head:

"Heads I win, tails I don't lose very much"

"Checklist"

"Cloners"

"Cannibals"

"Spawners"

"Chinches" 

Probably throw in there "compound by 27%" too if you wanted.

Now, compare this to Buffett. If you watch a speech of his from the last couple of years or 10 years ago or 30 years ago, he basically says the same things, over and over. Though he was fearful during covid for sure.

 

 

It's tough. He's vocal about it but he's still struggling with "quality". Reminds me of Robert Pirsig's novel, Zen and the art of motorcycle maintenance. 

- "Quality is a characteristic of thought and statement that is recognized by a nonthinking process.  Because definitions are a product of rigid, formal thinking, quality cannot be defined.""

"intellectuals usually have the greatest trouble seeing this Quality, precisely because they are so swift and absolute about snapping everything into intellectual form."

"People differ about Quality, not because Quality is different, but because people are different in terms of experience."

Everytime Buffett has attempted to define "quality" in a specific parochial way - "so good a fool can run", "inevitable", "non-changing", it has not stood the test of time. 

It's paradoxical; mental models are good but model rigidity is bad. 

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2 hours ago, n.r98 said:

It's tough. He's vocal about it but he's still struggling with "quality". Reminds me of Robert Pirsig's novel, Zen and the art of motorcycle maintenance. 

- "Quality is a characteristic of thought and statement that is recognized by a nonthinking process.  Because definitions are a product of rigid, formal thinking, quality cannot be defined.""

"intellectuals usually have the greatest trouble seeing this Quality, precisely because they are so swift and absolute about snapping everything into intellectual form."

"People differ about Quality, not because Quality is different, but because people are different in terms of experience."

Everytime Buffett has attempted to define "quality" in a specific parochial way - "so good a fool can run", "inevitable", "non-changing", it has not stood the test of time. 

It's paradoxical; mental models are good but model rigidity is bad. 

@n.r98, this was interesting. Thank you.

It seems every time Mr. Pabrai comes up, there seems to be a bimodal distribution of opinions. In the book you mention, the author describes the difficulty with the definition of Quality. Instead of one uniform definition, one could focus on two aspects, the 'hip' (more emotional) and the 'square' (more rational).

The potential issue here is that the person is both a teacher and a seller (often simultaneously) and both aspects perhaps require a separate (and more flexible) type of assessment.

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I guess I see no evidence that Pabrai is a superior investor. The only time he's outperformed since opening his fund was when every other "value" manager outperformed. Granted, he killed it then but then he had 70%+ drawdown too. I'm sure the average dollar weighted his fund has underperformed the S&P 500 - with a higher drawdown to boot.

I will him credit for his sales ability though. Top notch there. 

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