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Pabrai in Forbes


keerthiprasad
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Excellent interview!  Thanks Keerthi!  The one thing I truly have admired watching Mohnish over the years is that he has become an incredible teacher and lecturer.  He has a very natural fluidity to his ideas and how he gets them across to the listener.  Combined with his self-deprecating sense of humor, it is always enjoyable to hear him speak.  Cheers!

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I enjoyed the interview -- the only critical thing I have to mention is that early on in the interview he stated that you could have pretty much thrown darts and done well.  At the end of the interview he started attributing his recent string of successes to a checklist:

 

 

We made a huge number of investments, more than any other period, any other 18-month period in our history. So with more activity so far, and it's a very short period, we have a much lower error rate.

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The other thing that is weird about Pabrai is that he talks about Buffett-Munger principles, but acts totally differently. I am not impressed with his portfolio holdings in terms of quality. He also seems more like a short term trader (darting in and out of positions quite regularly) than a true value investor. 

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I havent seen him dart out of positions and then back in. With the exception of Berkshire. He seems to imulate the value investor of yester year. More Buffett Partnership and less Munger.

 

I like this quote from Pabrai.

 

Monish Pabrai - "Plan A is always to buy the Coke and Moody's of the world at 50% off. If you buy these type of businesses at that discount and it takes 2-3 years to trade at intrinsic value, you'll do very well. Intrinsic value will be much higher in 2 to 3 years. So 50 cents may be worth $1.30 or $1.40. This is always Plan A. But plan A is virtually impossible to execute across the entire portfolio because they are so very very rare. (Work Horse Positions)

 

When plan A fails, we go to plan B. Plan B is to buy at half off, regardless of business quality (as long as you're pretty sure intrinsic value is very unlikely to decline). Most of Pabrai Funds investments over the years have been Plan B. " (Value Holdings).

 

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I havent seen him dart out of positions and then back in.

 

How about Pinnacle Airlines, Harvest Natural resources, Berkshire (he calls it a cash substitute? why?), in and out of Fairfax, Cresud, Sears, Cryptologic, Horsehead Holdings, etc, etc.... ?

 

One of his picks Delta financial went to zero.

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Mistakes which were sold - Pinnacle Airlines, Harvest Natural Resources, Crypto, Delta.

 

Berkshire is better than holding Cash is his argument, when he has excess cash in his funds he holds Berkshire.

Just about everyone on this board dances in and out of FFH as it hits and then quickly drops below intrinsic value.

 

I think Horsehead hit intrinsic value but I dont follow it.

I dont know what happened with Cresud or Sears.

 

Having something going to zero is making a mistake. Nothing more he thought he was buying Delta for more then it was worth and was wrong.

 

Trading a stock at 90% of IV and buying something else below 50% is value investing. Buffett said he has done the same, selling 50% of IV to buy 25% of IV. Selling and buying something later when the facts change or your rationale changes on it is value investing too. Bruce Berkowitz did the same on Berkshire and he would be considered one of the most successful value investors in the last 10 years. I think you are confusing value investing with buy and hold investing.

 

 

 

 

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I think some board members have a misconstrued idea of what value investing is...or at the very least value investing in terms of Ben Graham.  You buy investments at a discount to intrinsic value and you sell when that margin of safety is reduced.  This whole Buffett "buy" and "hold" value investing idea is something that came up because Buffett had to do so to encourage people to sell their businesses to him.  Why would someone sell their life's work unless you promise not to sell it off in bits and pieces or to someone else at a profit! 

 

If you've read the early Buffett Partnership letters, and even early days of Berkshire itself, you've seen Buffett trade out of positions as the prices moved closer to intrinsic value.  Mohnish is doing just that.  Sardar will have to behave like modern-day Buffett, as does Prem, but Mohnish understands that the markets provide him an opportunity to exploit the folly of others.  What Buffett has done with Berkshire is not only amazing, but admirable from an ethical standpoint.  If Buffett behaved like young Buffett, his returns would have been better by selling certain businesses or positions as they reached intrinsic value or surpassed it.  Cheers!

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It is obvious what the difference between value investing and buy-and-hold is. I highly doubt anyone (including me) on this board misunderstands the difference (one is related to buying securities at a discount to their business value, the other is related to holding period).

 

Ben Graham paid a huge amount of attention to the balance sheet of the enterprise which does not appear to the case at least with some of Pabrai's investments.

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Buy and hold works amazingly well when intrinsic value keeps growing.  Everything held equal it is by far the best way to invest unless you don't pay taxes.  

For the record Fairfax hasn't been near intrinsic value in the 4+ years I've owned it so maybe you are not selling at IV, you are trading in and out of a stock based on historic patterns.  

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Guest longinvestor

Among all things Pabrai has said, the one which stuck with me is the one about investors not being able to sit in the middle of the room and do nothing at all. I'm afraid many viewpoints expressed on this board reveal the kind of restlessness Pabrai alludes to. Hyper-active and  busy-body folks run rampant on this board. I scratch my head often to see how any of this is value investing. But there are enough value investors in the midst to keep this interesting.  

 

 

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Pabrai is spot on with the patience comment. I began my serious investment work at the tail end of the boom, and one of the most common techniques from "value investors" was the relative valuation method. "It's a good buy since the peers are trading at 17X earnings!" "A is trading at 15X earnings when B is trading at 18X even though A grows faster!"

 

Impatience seems to turn normally studious investors into stock retailers.

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I also liked the end of the article where Pabrai talks about double-checking for sustainability of profit. He mentions normalized earnings as a barometer, but that method can fool you if there is a major secular shift.

 

It reminds me of a great speech by William Dudley where he talks about the role of positive-feedback in the credit crisis. If you are just looking at the economy from the point of view of a retailer, you only see higher margins due to wealthier customers. You don't see that you are a recipient of a huge positive-feedback mechanism.

 

http://www.ny.frb.org/newsevents/speeches/2010/dud100407.html

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Great words of wisdom from Monish!  His use of a checklist is a BIG idea we can all use to great profit.  I have a friend who is an expert pilot, but before taking off, he takes out this plastic card that forces him to check off things that even new pilots know how to do very well.  Really simple things like sticking a dipstick into the gas tank to make sure the tank really is full.

 

Some have criticized Monish for his mistakes, but the truth is that we all

make them.  The important thing is that we not only learn from them, but improve our investing process.  This is what he has done: use a simple tool that can dramatically improve his batting average.

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Buy and hold works amazingly well when intrinsic value keeps growing.  Everything held equal it is by far the best way to invest unless you don't pay taxes. 

 

I disagree.  I think buy and hold reduces your margin of safety as valuations rise relative to intrinsic value.  Buffett could have done a whole heck of alot with the cash tied up in Coke over the last twelve years...even after paying capital gains taxes!

 

For the record Fairfax hasn't been near intrinsic value in the 4+ years I've owned it so maybe you are not selling at IV, you are trading in and out of a stock based on historic patterns.

 

A stock doesn't need to be near intrinsic value for someone to sell it.  If you buy stocks when they are less than 40% of intrinsic value, and sell when they are at 75%, is that worse than buying a stock at 60% of intrinsic value and selling it at 95% of intrinsic value?  Simple mathematics would tell you that the former provides a return of almost 90%, while the latter provides a return of about 60%.  Cheers!

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Say you buy a stock or 5-6 stocks at 38% of intrinsic value and its value compounds at 14.4% a year for a decade and you get paid IV at the end.  You'd make 9.5 times your initial investment after a decade better than 28% after tax.  I know thats kinda of pushing it in terms of patience but you have to admit that you can earn very healthy returns just buying and holding. 

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I tried the buy and hold method for years and left money on the table too often, or had opportunity cost too often.  These days I reassess everything on a continuous basis.  A recent example would be Kingsway Financial.  I held it for years.  It was long on promise but always seemed to be short on delivery.  After a couple of crappy quarters of earnings and more promises to right the ship I took my experience from FFH in the early 2000s and dumped the stock.  Managed to keep most of my shirt.  This was something I should have done with FFH in 1999 but didn't.  

 

Other examples I have handled recently of a more positive nature:

AXP Leaps - bought when AXP was in the teens and sold as AXP approached $40.

SBUX Leaps - bought when SBUX was below $10 - sold around $20.

GE Leaps - bought when GE was in the single digits and teens - still holding -waiting for $23 to start to reduce.  Intend to convert some and make it a permanent buy and hold assuming GE raises the dividend.

SNS common - It doubled out of what I consider to be a safe level so I sold.

 

One I am waiting to reach fair or intrinsic value:  sfk.un.

 

Oldye, I am sure you can concur that you will sell sfk at a certain point.  It is in a cyclical and possibly contracting business after all.  

 

RE: Buffett and Coke:  There is no way he could have sold Coke without losing his gains.  He has a bit of a visibility problem now.  Buffett was forced to become a buy and holder.  I am not.

 

I am sure that at times getting rid of a stock is not a productive way of doing things.  I had alot of Leaps on Wells Fargo and sold them all.  Converting them may have made more sense but I had to make a decision one way or the other and it was easier to sell than raise extra capital to finance the conversion.  

 

Obviously capital gains taxes can be an issue.  To try and manage it I take losses where I can.  I think this is easier in Canada because we dont have the long term/short term holding issue.  I can sell something such as sfk.un, which I did and buy it back a few months later at a much lower rate.  I booked the losses, which were my biggest ever, against the significant gains made on other stocks.

 

I then repurchased it at 10 cents on the dollar and have now more than made up the losses.  Sometimes we get lucky.    

 

 

 

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We use something very similar.

 

You buy coy X because its cheap from a business standpoint (place in cycle, bad PR, etc), & you essentially hold it untill the business turns. You then continue to hold if the next 6 months suggest there will be further improvement, or else you at least partially hedge. In effect you do a quarterly EMV assessment, & track it on a graph..... And if you know the company, & have tracked it for a while, your EMV assessment should be pretty good.

 

You use 'value investment' to find coy X; EMV assessment & hedging is essentially a version of Graham; the rest is effectively early WEB. And as you cant predict bankruptcy you rely on a healthy MOS. The hedges also reduce your equity volatilty somewhat.

 

Point? Value investment is just a tool box & an approach, it is not a 'formula'

 

SD

 

 

 

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I have a small problem with his man of leisure idea if it is taken too far.

 

Even if the markets are fairly valued or overvalued it doesn't mean you don't have any work to do. Companies can still be analyzed and researched,  in fact, I would spend even more time analyzing companies when the markets are expensive because I'd want to be fully prepared to take advantage of the opportunity when the inevitable downfall occurs. When the markets collapse, that's when prepackaged research is the most valuable.  Pabrai is a smart guy and I'd bet he isn't playing racquetball and bridge all day but I hope people don't get the wrong idea and think "oh, the markets are fairly valued so I'll take a respite and analyze again once the markets fall"

 

He said he doesn't short sell because his upside is limited and his downside is infinite. I know his upside is limited, but the downside could also be limited by buying call options.  Personally I've never short sold or bought options, so maybe I'm being naive (usually am) but I just don't fully buy his argument.

 

Also, I really really like the idea of short selling. It makes you a skeptic and helps fine tune your bulls**t meter. Optimism kills in investing, so having an incentive to be pessimistic seems like a good way to balance out our human capacity for optimism.

 

Thanks for posting the Pabrai interview!

 

edit: my grammar is terrible

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His argument on short selling is shared by many including Buffett. (I remember hearing he almost went bankrupt shorting a stock when he was young, it could have been someone else though).

 

This is one of my favorite quotes from last year - Sardar Biglari - "We buy from pessimists and sell to optimists." That is value investing.

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The hardest part about running a fund may be keeping your investors happy, in good times and bad.  Look what happened to Michael Burry!  It seems to me that this is where Mohnish really excels, he's a great communicator, as Sanjeev wrote above.

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