Outlook India - Mohnish Pabrai

[Parsad]

Pretty long interview with Mohnish in Outlook India:

 

http://business.outlookindia.com/article.aspx?283880

 

Also interviews with other value investors, including Howard Marks & Wilbur Ross:

 

http://business.outlookindia.com/content.aspx?site=2&issue=10969

 

Cheers!

 

[nkp007]

Pretty long interview with Mohnish in Outlook India:

 

http://business.outlookindia.com/article.aspx?283880

 

Also interviews with other value investors, including Howard Marks & Wilbur Ross:

 

http://business.outlookindia.com/content.aspx?site=2&issue=10969

 

Cheers!

 

Holy crap. The Mohnish interview is epic... and I'm only two paragraphs in. WOW. He crystalizes his thoughts so well.

[Parsad]

I really like the quote:

 

There is a famous quote:  if wealth is lost, nothing is lost. If health is lost, something is lost and if character is lost, everything is lost.

 

Also, he says his family is the 2nd largest investor in the fund...who the hell is first!  He's got like $40-45M in there...must be an endowment or something. 

 

Very good interview!  Cheers!

[PlanMaestro]

Yes, very good one. Thanks Sanjeev.

[txlaw]

Excellent interview.

 

I think he's wrong on SHLD, though.  (Sorry, couldn't resist saying that.)

[Guest hellsten]

Thanks. Great interview.

 

Sounds like he would never invest in SHLD or airlines again:

 

I can give you a couple of examples of permanent losses of capital and my critical learning from those mistakes. One is Sears Holdings. I made this investment because the vast real estate and brand assets of this company are worth multiples of the stock price. But I learnt that those are virtually impossible to monetise because one would need to liquidate the business and lay off tens of thousands of workers. That is gut-wrenching and highly unlikely. Another one is Pinnacle Airlines.

 

Traditional airlines are a losing proposition because of various structural issues — your pricing is set by your dumbest competitor, your costs are subject to a duopoly of airplane manufacturers, a duopoly of engine manufacturers, and a duopoly of maintenance guys and all of them can get whatever they want from you. On top of it, your entire workforce is unionised on every front. You don’t have any leeway to control cost.

 

Donald Smith Co. sees value in airlines stocks today http://whalewisdom.com/filer/donald-smith-co-inc. (>10% in airline stocks). Berkowitz still believes SHLD is cheap. If I remember correctly, Pabrai told Sanjeev he didn't like Dell :)

 

“Unlike brain surgery, in investing you can be wrong 40% of the time and still do fine”

 

Unrelated to Pabrai, but I like the quote from Robert Shiller (http://business.outlookindia.com/content.aspx?site=2&issue=10969):

“Bubbles only burst after the critics of the bubble have been discredited by years of rising prices”

[txlaw]

Donald Smith Co. sees value in airlines stocks today http://whalewisdom.com/filer/donald-smith-co-inc. (>10% in airline stocks). Berkowitz still believes SHLD is cheap. If I remember correctly, Pabrai told Sanjeev he didn't like Dell :)

 

He certainly did! :D

 

Microsoft, Silver Lake, SEAM, et al, including Sanjeev, thought otherwise.

 

And that's what great about this board.  We tend to give our opinions even when they are contrary to the greats.

[Parsad]

Donald Smith Co. sees value in airlines stocks today http://whalewisdom.com/filer/donald-smith-co-inc. (>10% in airline stocks). Berkowitz still believes SHLD is cheap. If I remember correctly, Pabrai told Sanjeev he didn't like Dell :)

 

He certainly did! :D

 

Microsoft, Silver Lake, SEAM, et al, including Sanjeev, thought otherwise.

 

And that's what great about this board.  We tend to give our opinions even when they are contrary to the greats.

 

We should qualify what Mohnish said about DELL, and I think this is his thinking about SHLD.  He believed Dell will destroy shareholder value long-term...more the business and the competition it faced.  Whereas I thought DELL was cheap on a nominal basis.  These two ideas aren't mutually exclusive.  So I'm not sure Mohnish was wrong long-term...he was just wrong about the value in the short-term. 

 

We are out of Dell now and we would have been out at a certain price regardless of the buyout...probably in the $15-18 range.  The buyout actually ended up being less than what we would have preferred to sell at, so it wasn't quite the home-run that we hoped for.  We did very well in a short-period of time, but not a grand slam.

 

I think SHLD may be similiar.  On a nominal basis, it is somewhat cheap, but that doesn't mean that long-term destruction of value won't continue to happen.  It's a rotten business with very good assets...now how do you monetize those assets before that rotten business eats it all up?  So far, it's eaten a massive chunk!  I think you've got a reasonably good chance with Eddie and Bruce controlling it, but they could do what Dell did and screw shareholders over as well.  And so far, Eddie's results of monetizing those assets has been very subpar.  Cheers!     

[Guest hellsten]

Donald Smith Co. sees value in airlines stocks today http://whalewisdom.com/filer/donald-smith-co-inc. (>10% in airline stocks). Berkowitz still believes SHLD is cheap. If I remember correctly, Pabrai told Sanjeev he didn't like Dell :)

 

He certainly did! :D

 

Microsoft, Silver Lake, SEAM, et al, including Sanjeev, thought otherwise.

 

And that's what great about this board.  We tend to give our opinions even when they are contrary to the greats.

 

We should qualify what Mohnish said about DELL, and I think this is his thinking about SHLD.  He believed Dell will destroy shareholder value long-term...more the business and the competition it faced.  Whereas I thought DELL was cheap on a nominal basis.  These two ideas aren't mutually exclusive.  So I'm not sure Mohnish was wrong long-term...he was just wrong about the value in the short-term. 

 

We are out of Dell now and we would have been out at a certain price regardless of the buyout...probably in the $15-18 range.  The buyout actually ended up being less than what we would have preferred to sell at, so it wasn't quite the home-run that we hoped for.  We did very well in a short-period of time, but not a grand slam.

 

I think SHLD may be similiar.  On a nominal basis, it is somewhat cheap, but that doesn't mean that long-term destruction of value won't continue to happen.  It's a rotten business with very good assets...now how do you monetize those assets before that rotten business eats it all up?  So far, it's eaten a massive chunk!  I think you've got a reasonably good chance with Eddie and Bruce controlling it, but they could do what Dell did and screw shareholders over as well.  And so far, Eddie's results of monetizing those assets has been very subpar.  Cheers!   

 

Thank you for clarifying. I agree that it is difficult to predict the long-term future and the impact of value destruction at Dell and Sears. I guess the same could be said about Chesapeake, so it would be interesting to know what Pabrai thinks about Chesapeake (~16% holding).

 

I'm perhaps simplifying too much, but Mohnish seems to like stocks where the price is cheap and the future trend is "easy" to see:

- BAC and C (turnaround almost complete, probably can't go much lower than in 2009 and 2011, interest rates must rise at some point?)

- Chesapeake (energy independence, natural gas price recovery, oil vs. gas price mismatch?)

- GM (cyclical low, cars can't get much older?)

 

My guess is that a housing recovery will help SHLD recover, but Lampert will probably take the company private before that happens :)

[txlaw]

Donald Smith Co. sees value in airlines stocks today http://whalewisdom.com/filer/donald-smith-co-inc. (>10% in airline stocks). Berkowitz still believes SHLD is cheap. If I remember correctly, Pabrai told Sanjeev he didn't like Dell :)

 

He certainly did! :D

 

Microsoft, Silver Lake, SEAM, et al, including Sanjeev, thought otherwise.

 

And that's what great about this board.  We tend to give our opinions even when they are contrary to the greats.

 

We should qualify what Mohnish said about DELL, and I think this is his thinking about SHLD.  He believed Dell will destroy shareholder value long-term...more the business and the competition it faced.  Whereas I thought DELL was cheap on a nominal basis.  These two ideas aren't mutually exclusive.  So I'm not sure Mohnish was wrong long-term...he was just wrong about the value in the short-term. 

 

We are out of Dell now and we would have been out at a certain price regardless of the buyout...probably in the $15-18 range.  The buyout actually ended up being less than what we would have preferred to sell at, so it wasn't quite the home-run that we hoped for.  We did very well in a short-period of time, but not a grand slam.

 

I think SHLD may be similiar.  On a nominal basis, it is somewhat cheap, but that doesn't mean that long-term destruction of value won't continue to happen.  It's a rotten business with very good assets...now how do you monetize those assets before that rotten business eats it all up?  So far, it's eaten a massive chunk!  I think you've got a reasonably good chance with Eddie and Bruce controlling it, but they could do what Dell did and screw shareholders over as well.  And so far, Eddie's results of monetizing those assets has been very subpar.  Cheers!   

 

Perhaps "cheap on a nominal basis" is not the best choice of terminology. 

 

Because that almost sounds like you're saying that using certain value-oriented metrics, DELL and SHLD appear(ed) to be cheap at least on a short term basis.  That sounds sort of like the "value trap" thesis espoused by Chanos et al. 

 

On the other hand, the substance of your post indicates that you are saying that both companies are/were trading under IV, but that there was some probability (perhaps, a high probability) that the IV at DELL and SHLD would be destroyed through mal-investment or non-optimal capital allocation (opportunity cost of not monetizing assets and reinvesting).

 

I'm going to assume the latter is what you meant -- and then disagree with both you and Pabrai. 

 

I think that DELL's capital allocation with respect to M&A (not with buybacks or dividend) has been okay and that, while they certainly are not transforming on the cheap, they have not burned the capital used in M&A.  I think DELL had no choice but to pay full prices to create a platform to become the mid-market IBM.  And that over the long term, what we will see is that as the ES&S biz grows, the returns on incrementally invested capital will go up quite substantially and that DELL earnings will benefit from the operating leverage inherent in their distribution channel assets.  IMO, Michael Dell understand this and is taking advantage of shareholders to steal the company and this growth platform.

 

With SHLD, I submit to the board, as I have before, that ESL has actually preserved and increased the long term value of SHLD's assets by proceeding slowly and focusing on run-off, rather than on liquidating assets at fire sale prices.  First, it is not entirely clear that ESL could ever have liquidated its RE assets during the financial crisis.  Second, I think ESL avoided monetizing RE (both owned and leased) at fire sale prices.  Third, liquidating a bunch of stores at once would have hurt the intangible assets  -- brand values and market share in appliance, tool, and H&G equipment market.

 

So I think ESL has done the right thing.

 

But, hey, disagreement is what makes a market.

[Parsad]

On the other hand, the substance of your post indicates that you are saying that both companies are/were trading under IV, but that there was some probability (perhaps, a high probability) that the IV at DELL and SHLD would be destroyed through mal-investment or non-optimal capital allocation (opportunity cost of not monetizing assets and reinvesting).

 

Hi Tx, yes this is exactly what I was referring to.  This potential for destruction (or growth) of capital allocation occurs in any business, but there has been a sort of history for the last few years that destruction was occurring at SHLD, and to a lesser degree at DELL.  It doesn't mean that is what is going to happen long-term, but management either missed the boat for a period of time, or have decided to transition the business and are somewhat at the mercy of competition.  I suspect Mohnish does not believe these trends are going to be reversed...I'm sort of ambivalent...I think it could go either way.  Cheers! 

[Guest valueInv]

Donald Smith Co. sees value in airlines stocks today http://whalewisdom.com/filer/donald-smith-co-inc. (>10% in airline stocks). Berkowitz still believes SHLD is cheap. If I remember correctly, Pabrai told Sanjeev he didn't like Dell :)

 

He certainly did! :D

 

Microsoft, Silver Lake, SEAM, et al, including Sanjeev, thought otherwise.

 

And that's what great about this board.  We tend to give our opinions even when they are contrary to the greats.

 

We should qualify what Mohnish said about DELL, and I think this is his thinking about SHLD.  He believed Dell will destroy shareholder value long-term...more the business and the competition it faced.  Whereas I thought DELL was cheap on a nominal basis.  These two ideas aren't mutually exclusive.  So I'm not sure Mohnish was wrong long-term...he was just wrong about the value in the short-term. 

 

We are out of Dell now and we would have been out at a certain price regardless of the buyout...probably in the $15-18 range.  The buyout actually ended up being less than what we would have preferred to sell at, so it wasn't quite the home-run that we hoped for.  We did very well in a short-period of time, but not a grand slam.

 

I think SHLD may be similiar.  On a nominal basis, it is somewhat cheap, but that doesn't mean that long-term destruction of value won't continue to happen.  It's a rotten business with very good assets...now how do you monetize those assets before that rotten business eats it all up?  So far, it's eaten a massive chunk!  I think you've got a reasonably good chance with Eddie and Bruce controlling it, but they could do what Dell did and screw shareholders over as well.  And so far, Eddie's results of monetizing those assets has been very subpar.  Cheers!   

 

Great post, Sanjeev! I'm impressed.

[Phaceliacapital]

Very interesting thanks!!

[claphands22]

Is he saying, he believes the stocks in his portfolio are trading at 1/5 of their IV?

 

Berkshire is a great company, somewhat undervalued, but it is not sitting at one-fifth the value. When it is at one-fifth the value, wake me up.

 

[Valuebo]

Is he saying, he believes the stocks in his portfolio are trading at 1/5 of their IV?

 

Berkshire is a great company, somewhat undervalued, but it is not sitting at one-fifth the value. When it is at one-fifth the value, wake me up.

 

 

I thought that was a somewhat silly comment. While financials aren't very leveraged now, they are far less safe than Berkshire. Expected returns say little without including risk.

[Mephistopheles]

I have nothing against Mohnish, I think he's great, and I've even met him once. I've always wondered though, why do people on this board knock Whitney Tilson for doing exactly what Mohnish is advocating (cloning), while at the same time they respect Mohnish? I personally don't think there is anything wrong with this strategy. It's not very creative, but at the end of the day these guys are responsible for safe guarding and growing OPM, whether their ideas are original or not.

[nkp007]

I have nothing against Mohnish, I think he's great, and I've even met him once. I've always wondered though, why do people on this board knock Whitney Tilson for doing exactly what Mohnish is advocating (cloning), while at the same time they respect Mohnish? I personally don't think there is anything wrong with this strategy. It's not very creative, but at the end of the day these guys are responsible for safe guarding and growing OPM, whether their ideas are original or not.

 

I think Mohnish has a high level of conviction and concentration that a lot of people respect. He's cloning some ideas, and then concentrating to levels very few do.

[bmichaud]

I have nothing against Mohnish, I think he's great, and I've even met him once. I've always wondered though, why do people on this board knock Whitney Tilson for doing exactly what Mohnish is advocating (cloning), while at the same time they respect Mohnish? I personally don't think there is anything wrong with this strategy. It's not very creative, but at the end of the day these guys are responsible for safe guarding and growing OPM, whether their ideas are original or not.

 

Monish is not on CNBC the day after a "whale" enters a new position touting it as his own (HK Dollar, JCP etc....)....nor is he on CNBC with his secretary cloning WEB.

[Phaceliacapital]

I think Mohnish has a high level of conviction and concentration that a lot of people respect. He's cloning some ideas, and then concentrating to levels very few do.

 

My thoughts exactly, and actually also my kind of mindset :)