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Pabrai in Forbes


keerthiprasad

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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.  

 

Mohnish has stated in the past that it's not worth his while investing unless he thinks he can make 20%.  He said that in an interview where he was talking about MSFT.  He didn't want to buy it because he didn't think he could make 20%.  I wonder if he has lowered his hurdle rate now that he has muck more money under management, and now that his long term record has fallen short of his hurdle rate.

 

The way the market behaves if you are buying something for 38% of value and it increases value by 14.4% a year you are going to see a huge gain in the early years relative to what you see in the latter years.  You'll probably make like 50% compounding for the first couple of years, then 40% then 30%, or something along those lines to quickly close the discount, then followed by much lower returns after that largely driven by the 14.4% IV gains -- it may average out to 28% when seen over 10 years... but those latter years will be a huge drag on the record of your early years.  But if I could be promised a "mere" 14.4% for the next decade I would sign the paperwork immediately.

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Guest kawikaho

"Another question is, "Is this a win-win business for the entire ecosystem?" So for example, if there's some company doing, you know, high-interest credit cards and they make a lot of money, that's not exactly, you know, helping society. So you might pass on that. Also, a liquor company or tobacco company, those can be great businesses, but in my book, I would just pass on those. Or a gambling business, and so on."

 

Sounds like a man with good ethics and principles.  I really like that.  Also, I've not had the best winning percentages with my longs, but for some odd reason, I've been 100% right on every short I've ever made (lots of dot coms, AMD, DRYS, TOL, GM, CIT).  I've started limiting my exposure to risk with options in the past year--buying, not writing, of course.  Options are something I've never gotten into before this past year.  They've been a useful tool to add into my portfolio.  So, although shorting might seem pretty foolhardy to some, the risk of ruin can make you scrutinize your decision much more than going long.  However, I don't think naked short selling should be allowed in the markets.  That's pure market manipulation and should be banned.

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"Tomorrow is never promised today"

 

You are absolutely right, Sfk will not compound intrinsic value over the decade at 14.4% per year, I think normalized Ebitda will be around 50-70m and years like the one we're having will be rare considering it took a severe recession, and unprecedented government subsidies to shuttered aprox. 15% of capacity.  They are building a new mill in Russia slated for 2012 that will increase worldwide capacity by about 6% coupled with the new generation capicity in Canada will reduce costs and in this business will probably be passed on to customers. 

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"Another question is, "Is this a win-win business for the entire ecosystem?" So for example, if there's some company doing, you know, high-interest credit cards and they make a lot of money, that's not exactly, you know, helping society. So you might pass on that. Also, a liquor company or tobacco company, those can be great businesses, but in my book, I would just pass on those. Or a gambling business, and so on."

 

Sounds like a man with good ethics and principles.  I really like that.  Also, I've not had the best winning percentages with my longs, but for some odd reason, I've been 100% right on every short I've ever made (lots of dot coms, AMD, DRYS, TOL, GM, CIT).  I've started limiting my exposure to risk with options in the past year--buying, not writing, of course. 

 

I think that he came up with that checklist item after losing almost everything in CCRT, and maybe DFC (although I'm not sure about DFC).  He put a lot into CCRT and lost pretty much all of it.  I'm really not sure that I would draw the conclusion he did, ie that he shouldn't invest in companies where they 'are win-win for the ecosystem'.  There is a lot to be said about high rate credit cards, and a lot of people defend them with good reason.  I'm not sure that CCRT was engaged in activities that weren't 'win-win' for the ecosystem, but I guess everyone had moral judgements and it's up to each person to deal within their boundaries...

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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!

 

Excellent point!

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As long as Buffett doesn't sell any wholly owned business, then people will trust him as the man they want to sell to.

 

However, those same people I bet could care less if he trades out of COP and JNJ.  Therefore he could most certainly have sold KO.  He even says he should have sold it.  It is one of his mistakes.

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Therefore he could most certainly have sold KO.  He even says he should have sold it.  It is one of his mistakes.

 

I've heard this before, that Buffett regretted not selling KO when it was selling in the 80's. Yet, I've never seen the source. Can anyone source where he said he should have sold KO?

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He's said it a number of times now...the most recent comments that have been published are in "The Snowball".  Also in this excerpt from Schroeder's other book:

 

http://www.huffingtonpost.com/alice-schroeder/warren-buffett-and-the-bu_b_351034.html

 

In the 1990s, more passivity crept into his investing style. By then, Berkshire had far more money than it could use. During the Internet bubble, rather than sell overvalued stocks such as Coca-Cola (another of his Inevitables), Buffett diluted the risk from these stocks to Berkshire's balance sheet by acquiring General Re.

 

With hindsight, he did say his failure to unload some of those stocks was a mistake. He explained that his role as a board member had gotten in the way of his selling Coca-Cola. Buffett finally stepped down from the board in February 2006, avoiding another referendum on his independence as a board member. Privately, Munger complained that Buffett should have resigned from the Coca-Cola board earlier so that they could have sold the stock. Selling would have pushed down the price, but not by as much as it eventually declined.

 

"I always used to tell Gates that a ham sandwich could run Coca-Cola. And it was a damn good thing, too, because we had a period there a couple of years ago where, if it hadn't been that great of a business, it might not have survived."

 

The company--and its stock--did rebound. By 2008, most of its business problems had been largely resolved, and CEO Neville Isdell, who announced his retirement in 2007, had settled the Justice Department investigation and closed a $200 million racial discrimination lawsuit. The new CEO, Muhtar Kent, had led the company's successful push into non-cola drinks, where Coca-Cola had been lagging and was strategically off course.

 

Still, as of early 2008, Coca-Cola's stock price, at $58, was fifty-six percent above its lowest price, but did not approach its pre-bubble high of more than $87 per share, and couldn't justify Berkshire's having held the stock for a decade. And it would soon turn out that Coca-Cola's stock price was tracking the overall stock market, which would be revealed as part of another speculative bubble, this one buoyed by the ebullient "consumer economy" and driven by cheap credit.  

 

Cheers!

 

 

 

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Therefore he could most certainly have sold KO.  He even says he should have sold it.  It is one of his mistakes.

 

I've heard this before, that Buffett regretted not selling KO when it was selling in the 80's. Yet, I've never seen the source. Can anyone source where he said he should have sold KO?

 

He doesn't specifically mention KO here, but he is alluding to it along with likely the rest of his portfolio.

http://www.berkshirehathaway.com/letters/2004ltr.pdf

 

Nevertheless, I can properly be criticized for merely clucking about nose-bleed valuations during the Bubble rather than acting on my views. Though I said at the time that certain of the stocks we held were priced ahead of themselves, I underestimated just how severe the overvaluation was. I talked when I should have walked.

 

He mentions the big positions, the desire not to sell for tax reasons etc... but what's wrong with a market short to hedge against market collapse?  That's what Prem does and I think it would solve Buffett's argument about the problem with selling huge concentrated stakes and paying taxes.  He is no stranger to writing S&P500 puts...  after all.

 

Pabrai and Buffett have said that shorting is no good because you can lose everything... but that ignores Prem's technique of buying out-of-the-money calls to hedge that risk.

 

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