market folly

Mohnish Pabrai of Pabrai Investment Funds recently held his annual meeting and thanks to Alex Bossert we're able to get a peek as to his latest thoughts. Pabrai is a value investor and our quote of the week featured his thoughts on emulating Warren Buffett, something he strives to do. Here are some selected excerpts from the question and answer session of the annual meeting:

"What are your views on position sizing?

His allocation policy changed in 2008 to reflect slightly elevated investment risks of his investment baskets and prior mistakes. If he has 10% positions it’s very hard to recover from a mistake. He discussed his new allocation framework with Charlie Munger who disagreed at first. After Mohnish explained it further, Charlie agreed that Berkshire Hathaway has achieved success with a more diversified portfolio. Mohnish talked about basket bets. When the risk is slightly elevated he will buy a basket of companies with small weightings. For example, he said he is currently researching companies in Japan. If he ends up buying companies there, he will buy a basket of companies each with small weightings in the portfolio. He said stocks there are very cheap.

What attracts you to a business?

When he finds a company that looks interesting he starts by thinking as a skeptic. He looks for something that will prove him wrong. He looks for areas of extreme mispricing. It has to be very undervalued but he also has to be able to understand it. He thinks there may be value in Coke bottlers in Japan. The Nikkei has done nothing for 27 years.

Can you name some great companies that you’d love to own at the right price?

Ikea, In and Out Burger, Costco, the low cost mines owned by BHP and Rio Tinto. Great companies are all over the place across the world. There are great companies in India and China but and ownership issues exists over there. Pricing is also an issue. Ben Graham’s approach was to go to the store and buy what was on sale and Charlie Munger’s approach is to go to the store and wait for quality items to go on sale. He likes Charlie’s framework."


The fact that Pabrai changed his stance on position sizing is intriguing as there are essentially two different schools of thought on that front: build concentrated positions and monitor them closely, or diversify risk among smaller positions. Value investors are usually firmly planted in one camp or the other and the debate as to which one is 'right' wages on. In a sense, it's a matter of personal preference and investing style. Pabrai noticed an inefficiency with his position sizing strategy during the crisis and sought to correct it to reduce risk.

Of the companies he'd most like to buy (at the right price of course), it's intriguing that he'd be most interested in companies that are low cost providers in their industry and that could possibly be a function of the economic environment we're in. Those of you trying to get a better grasp on the amount of research he does on any given company will be interested to know that for his previous investment in Teck Cominco (TCK), he read the last 8 years worth of annual reports to understand the business as he spends a lot of time focusing on the balance sheet. Head to Alex Bossert's summary for the full meeting notes. And if you want to hear Pabrai's latest investment ideas, he'll be speaking at the Value Investing Congress (sign-up fast, only 17 seats remain).