Mohnish Pabrai Boston College Presentation

[indythinker85]

[Packer16]

Another nice shout out to CoBF.  Did you notice two of Monish's goto sources for additional information about ideas is Value Investors Club and this site?  Sanjeev has created a world class investment site for sure.

 

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[Guest hellsten]

 

Thanks for posting. It helped me understand why he owns ZINC and how he thinks about investing in commodity companies in general.

[Packer16]

The segmentation concept for commodity businesses is a good selection model for commodities based businesses.  I have always had a hard time trying to come up with a good selection tool other than large amounts of resources and qualitatively included low-cost production.  Low cost can provide a pretty nice moat if you don't have overfinanced marginal competitors.

 

Packer

[txlaw]

That was a good presentation.

 

Does anybody know what software he might have used for the 2 minute video presentation?  If it's free/inexpensive, I'd like to play around with it.

[racemize]

That was a good presentation.

 

Does anybody know what software he might have used for the 2 minute video presentation?  If it's free/inexpensive, I'd like to play around with it.

 

my wife has made a few of those types of presentations--there's some special software for it I think.  I'll ask her for some names.

[txlaw]

That was a good presentation.

 

Does anybody know what software he might have used for the 2 minute video presentation?  If it's free/inexpensive, I'd like to play around with it.

 

my wife has made a few of those types of presentations--there's some special software for it I think.  I'll ask her for some names.

 

Sweet, thanks.

[ERICOPOLY]

 

He puts out John Arrillaga's name in that video.  I went to Pinewood School with the children of his business partner, Richard Peery.  Funny.  Actually, I'm a Facebook friend of one if the Peery kids, for whatever trivia value that has to you :-)

 

Their story is pretty awesome:

In the 1960s, Arrillaga and business partner Richard Peery bought California farmland and converted it into office space.[3] They became two of Silicon Valley's biggest commercial landlords with more than 12,000,000 square feet (1,100,000 m2).[4]

 

In 2006, he sold 5,300,000 sq ft (490,000 m2) of his real estate holdings for roughly $1.1 billion

 

http://en.wikipedia.org/wiki/John_Arrillaga

[LC]

A good free presentation tool is prezi (prezi.com)

[Guest 50centdollars]

Does anyone know why Monish didn't buy the BAC.A warrants? He switched from GM common to class B warrants, why didn't he buy leverage on BAC?

[Packer16]

The GM's leverage is alot cheaper than BAC's leverage. By my calc the cost of GM leverage is 0.6% per year while BAC's is closer to 5.6% per year.

 

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[phil_Buffett]

very nice Video from mohnish  :)

[racemize]

The GM's leverage is alot cheaper than BAC's leverage. By my calc the cost of GM leverage is 0.6% per year while BAC's is closer to 5.6% per year.

 

Packer

 

Hi Packer, I've got it at 0.6% for GM, but 7.95% for BAC--how do you get to 5.6%?

[Packer16]

I annuallize the (strike price + warrant price - stock price) / strike price over the remaining period of the warrant (5.12 years).

 

Packer

[ERICOPOLY]

What are the anti-dilution provisions on the GM "B" warrant?  A 3% dividend on the common would raise the cost of leverage on the warrant by 600 bps if the warrant strike were 50% of the stock price.  But that would be if there were no provisions for dividends at all -- don't know if there are.

[racemize]

I annuallize the (strike price + warrant price - stock price) / strike price over the remaining period of the warrant (5.12 years).

 

Packer

 

I see--I calculate it by figuring out where owning the warrants are better than owning the common and annualizing that number. 

 

For example, the point where the warrants make the same as the common is currently $22.94.  Thus, my rate is $22.94/$15.56, annualized, which is currently 7.9%, or since this is at parity, it would also be ($22.94-$13.30)/$6.54, or 7.9% annualized.  I also usually adjust for missed dividends, which adds be 0.01*remaining number of quarters to the $22.94 number, adjusting to 7.95% per year.  I'm not totally sure if that dividend adjustment is strictly the right way to do it, but it makes some sense (those are the raw dividends that were missed).

 

In your calculation, you are calculating how much extra your are paying now for the leverage (strike + warrant price - stock price), which makes sense.  Why then divide that by the strike?  Seems like you would want to divide by your cost (warrant price)? 

 

In any event, it seems like the first approach gives a slightly better indication of cost, since you could have bought the common instead of the option/warrant.  Is there an advantage to the second approach I'm missing?

[Guest hellsten]

Does anyone know why Monish didn't buy the BAC.A warrants? He switched from GM common to class B warrants, why didn't he buy leverage on BAC?

 

No idea, but he said this in 2009:

 

Q: Would you invest in warrants, options or short stocks?

 

A: Won’t look at anything except possibly covered calls. He has experimented in his personal portfolio and so far only lost money. To invest he would have to go through an amendment process with investors.

 

http://www.gurufocus.com/news/70886/pabrai-funds-annual-meeting-notes-2009-huntington-beach-california

[racemize]

What are the anti-dilution provisions on the GM "B" warrant?  A 3% dividend on the common would raise the cost of leverage on the warrant by 600 bps if the warrant strike were 50% of the stock price.  But that would be if there were no provisions for dividends at all -- don't know if there are.

 

They have almost everything the TARP warrants have (I think), except for ordinary dividend thresholds, so ordinary dividends will always cost extra.  There is protection for extraordinary dividends, stock splits, etc.

 

With regard to the dividends and accounting for missing them in the cost of leverage calculation, I'm not sure of the best way to do that.  In your quote there, you indicated that a 3% dividend equates to a 6% raise in cost of leverage if the warrant strike were 50% of stock; I'm a little confused there. 

 

For example, if I put $10 in the common, I would get $0.30 cents in dividend for the 3% yield.  If I put $10 in the warrants instead, I would lose only the $0.3, not $0.6.  Alternatively, if I put $5 in the warrants (equivalent notional exposure to $10 common), I would only miss $0.15.  How is it that the cost of leverage goes up to 6%?

 

Edited

As noted above, what I've been doing is calculating the break-even price for the warrants/common, and then simply adding the dividend yield of all of the missed dividends to that, and then annualizing that number / current stock price.  Thus, you have to get to the break even point, and then get the sum of missed dividends (using yield values, not raw) on top in order to truly break-even.  I've been feeling that there is something wrong with this approach, but I'm not sure what it is. 

[Packer16]

The way I look at call option is you are buying the stock in part by borrowing the strike price until expiration.  So I calculate the value above intrinsic value as the cost to borrow the strike price until expiration where I will have to pay it to get the stock.  I have not accounted for dividends but I have a version where you include a lower strike price (lower cost).  In this case it has a lower borrowing rate of 3.2%.  Which intuitively makes sense as the cost to borrow should go down if you have a value-added feature.

 

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[racemize]

I suppose you'll just come back and say that with a margin + put strategy, you would have bought $20 of stock with $10 of capital, giving you $0.6 dividends on $10 of cash.  Since before the dividend, you were already paying the margin cost + puts at $10, the additional 0.6 is all "free", so a warrant holder, having a similar cost of leverage as the margin cost + puts, would just be losing that 600 bp.

 

I'm not sure how to apply that to the call strategy, since $10 of calls only misses $10 * 3% dividends... 

[racemize]

The way I look at call option is you are buying the stock in part by borrowing the strike price until expiration.  So I calculate the value above intrinsic value as the cost to borrow the strike price until expiration where I will have to pay it to get the stock.  I have not accounted for dividends but I have a version where you include a lower strike price (lower cost).  In this case it has a lower borrowing rate of 3.2%.  Which intuitively makes sense as the cost to borrow should go down if you have a value-added feature.

 

Packer

 

Right, that makes sense if you compare your alternative to cash--I guess when I'm looking at leverage, I'm comparing it as an alternative of buying the common, so the cost of leverage has to go up, as the common necessarily goes up some amount in order for you to make money in the levered vehicle.

 

With regard to the dividends, I only account for "missed" dividends.  In the case of BAC-A warrants, you will only miss the 0.01 per quarter, since that is the threshold.  Any amount of dividends above 0.01 is accounted for by the adjustment in strike/# of warrants.  Thus, the lower strike price on the warrants is offset by actually receiving the dividends as a common holder.  That being said, that thinking only applies when comparing warrant to common, and not warrant to cash, which is what you appear to be doing.

 

 

[Guest]

I know you guys are calulating the GM and BAC A warrants but is the cost of leverage on the AIG warrants around 10.6% now?

 

Following race's example

 

$74.95 (breakeven) / $49.55 (current stock price) = 1.51 * 7 (roughly 7 years left) = 10.58% Add a bit more for possible dividends. If this is right, isn't the quite a bit more expensive than it's been in the past?

[racemize]

I know you guys are calulating the GM and BAC A warrants but is the cost of leverage on the AIG warrants around 10.6% now?

 

Following race's example

 

$74.95 (breakeven) / $49.55 (current stock price) = 1.51 * 7 (roughly 7 years left) = 10.58% Add a bit more for possible dividends. If this is right, isn't the quite a bit more expensive than it's been in the past?

 

I think your math is off once you hit 1.51.  From that number do the following:

 

1.52-1 = 52% raw gain needed to hit 74.95 from this point.  Annualzing that number is 5.98%.  Then, you can model dividends however you like.  The current dividend is 0.1, so all of those missed dividends adds from 74.95 to 76.07 (this uses yield and not raw missed dividends), which is the new break-even point, giving an annualized rate of 6.2%.  Alternatively, you could push all the way up to .17 (the threshold) since it will likely get to that point in the future, pushing 74.95 to 76.82 or 6.35% annualized.

 

[Packer16]

I am comparing it to cash.  I calculate a return on both the common stock and warrant seperately to determine the differing expected returns.  I assume a value of 1x BV as fair value and a 9% RoE going forward for BAC.  So for the BAC warrants I calculate an annual RoR of 25% versus 12% for the common.  So the bridge is I am borrowing the strike price at 5.6% and investing the proceeds at 12%.

 

Packer 

[racemize]

I am comparing it to cash.  I calculate a return on both the common stock and warrant seperately to determine the differing expected returns.  I assume a value of 1x BV as fair value and a 9% RoE going forward for BAC.  So for the BAC warrants I calculate an annual RoR of 25% versus 12% for the common.  So the bridge is I am borrowing the strike price at 5.6% and investing the proceeds at 12%.

 

Packer

 

I see--I think I'm just doing the comparison all in one go.