market folly

A reader sent in notes from Mohnish Pabrai's annual meeting that recently took place.  He runs Pabrai Investment Funds and tries to emulate Warren Buffett with his value approach.

Pabrai currently has around $540 million under management and detailed a post mortem on some of his past holdings, revealing his mistakes were: 1) permanent loss of capital, 2) mistakes of omission and 3) selling something to buy something else and the exited business does better.  Pabrai has seen 13.3% annualized returns since inception.


Question & Answer Session

Q: You don't use explicit leverage but you have lots of leveraged investments in the portfolio?

A: Munger says 4 stocks is diversified.  If you owned the best apartment building in town, the highest quality business, Ford dealership, and other, you will do pretty well.  Bet in financials is around 25% of fund.  Munger says you can't invest in financial services companies without understanding ethos of management.


Q: Sectors to avoid?

A: Avoid what you can't understand and he doesn't like industries with rapid change (like technology or biotech).


Q: Life's 3 most important decisions?

A: Person he married, father started and bk'ed 15 companies in 15 industries.  Father identified gap but then he was eternal optimist.  Mohnish went from engineering to marketing.  Then his father pushed him out to start an information company.  Read Buffett by Lowenstein in 1994 and a light went on.  Leverage time using investing in businesses and let other guys run the business.


Q: Other idea generation tools besides 13F filings?

A: Cloning is a powerful concept.  Reverse engineer trades.  Third Avenue, Long Leaf Partners, Leucadia, Fairfax, Manual of Ideas are all places to look.


Q: Number of portfolio positions expanded after 2008 and now back to concentrated, why?

A: His natural tendency is to be concentrated.  He was shell shocked and there were a ton of big ideas available back then.  Good ideas are now scarce so better off making a good sized bet rather than 1% or 2% positions.  He holds cash now - any money put to work in late 2008 could have been a 4x.


Q: If things are cheap, why hold so much cash?

A: Not a flood of great ideas.  If he finds more he'll put it to work.  He's looking for 4x or 5x return to get interested with muted risk.


Q: QE3 how does it change what you do?

A: Bernanke doesn't need to announce QE4... it is 500 billion per year.  Not a macro guy but fairly in favor of what Bernanke has done.  Fed good at breaking ability but better than fixing things.  Don't see inflation currently but do see signs of significant unemployment.


Q: Do you model businesses, such as discounted cashflow?

A: Entrepreneurs don't use spreadsheets.  3 or 4 factors are important to each business: just focus on those factors.  Spreadsheets give you an imprecise guess of precision.



For more on this investor, we've posted up Pabrai's thoughts on investment checklists as well as his take on how you can invest like Warren Buffett.