What You’ll Learn
- Mohnish Pabrai’s value investing philosophy in 2018
- The evolution of the Dhando checklist
- Philanthropy & Pabrai’s strange investment choice
[timeless]
Q2 hedge fund letters, conference, scoops etc
You can find the original interview text here.
This is a summary of the interview as there is a lot of meat to dig into.
If you don’t know Mohnish Pabrai, Pabrai is a technologist turned super-investor and now owns Pabrai Investment Funds which manages more than $800M.
He follows in the footsteps of Buffett and Munger.
This in-depth interview delves into Buffet & Munger, the Dhando checklist, and value investing in general.
On Value Investing
- Pabrai thinks there will not be any major changes when it comes to value investing
- Then there are two sides of the market: euphoric & pessimistic. He said that it’s easier to find mispriced securities during pessimistic periods.
- He said that periods of pessimism and euphoria is geographic in a way that some place will be euphoric and other places pessimistic.
- He likes to invest in places like South Korea and Japan:
“The markets vacillate between fear and greed, and especially in Japa n and South Korea there has been a very long period where markets have flatlined or gone negative. Generally when you have multi-decade periods of that sort of activity then market participants throw in the towel and go on. That’s when you should be stepping in as an investor.”
- There are no USA stocks in the Pabrai funds: “I just can’t find much in US markets at this time.”
Why no USA stocks?
“I don’t look at investing at a macro level.”
“So you have a diminishing pool of companies that are being tracked by an increasing pool of high-IQ people with significant amounts of capital. The combination of the two is not great for investors.”
- USA stocks dropped from 8,000 securities to about 3,500 with high IQ eyeballs looking into them.
- Investing strategy is bottoms-up and one at a time. He said he just doesn’t see mispricings in US stocks anymore unlike in India as an example.
Lunch with Buffett
- He didn’t have much expectations about the lunch, he just wants to thank Buffett for “teaching” him about investing. The six-figure bid was going to charity anyway.
- Buffett really put in the effort to give value to the people who won the auction.
- Pabrai thinks that Buffett & Munger’s knowledge are out there in the public domain already. What he got from the lunch was insight on what was important or less important to Buffett.
“You can grade yourself based on what you think the world thinks of you – an outer scorecard, or you can grade yourself internally – an inner scorecard.” – Warren Buffett (talking about his “inner scorecard” during lunch with Pabrai & Guy Spier)
Using Berkshire shares
- Pabrai is not using Berkshire shares anymore.
- A pitfall when using Berkshire shares is that when the market corrects itself everything goes down including Berkshire.
- It’s best to leave cash as cash because you have the freedom and optionality to put it to work when opportunities come up.
The evolution of the Dhando framework and the difference from other principles
- The principle is still – heads I win, tails I don’t lose much.
“The only evolution, not so much in the Dhando framework but more in my own framework of looking at businesses, is that I pay more attention to the qualitative factors around a business than the quantitative.” – Mohnish Pabrai
- He learned that if you have an exceptional manager even if they don’t have great businesses that they’re running, they will produce incredible results.
The most important part of Pabrai’s investment checklist
- Pabrai’s current checklist has 150 questions organized into categories.
- He said that the biggest reason why businesses and investments don’t do well is leverage. His checklist has categories in leverage, debt, etc…
- Another category is a toss up between management and ownership or comparative advantage and the durability of the moat.
“Those three areas, leverage, management / ownership, and comparative advantage / moats, make up 70-80% of my checklist. Beyond that, it goes into other areas, including environmental factors, labor / unions and some other things.”
- The checklist was made bearing in mind specific failures that great investors made.
- He runs every new idea through this checklist.
- The process:
- Run the idea through the checklist which brings up a few questions he can’t answer.
- He goes back. Do the work on the questions.
- Run it again which doesn’t take longer than 30 minutes
- The checklist is a living document that gets updated all the time
How concentrated is your portfolio & how often do you trade in & out of positions
- By the time you get to the 6th position that accounts for 75% of the portfolio. The top two positions, top two or three, might approach 50% of the portfolio.
High-water mark reliant fee structure & management incentives
“Both Charlie and Warren managed money without skimming off the top. I think that money managers in general, if they are any good at what they do, they’ll have been successful in the past, so in general are wealthy. Once you have a base level of wealth, why do you need to have a low ethics fee approach designed to make money where you make money when your investors don’t? That’s just not right.” – Mohnish Pabrai
What are the biggest biases or heuristics you’ve identified that negatively impacted your investment performance?
- Preconceived perspectives
- No person has enough time to look at more than a small handful of businesses in some depth. Even in the USA when there is 3,500 securities.
- Commitment bias – the entitlement we feel when we spend time researching a stock, “Hey, if I spent some time on it, I ought to make money on it”.
Why do you not have any analysts? How has this contributed to the success of the Pabrai Funds?
- Commandment #1 – don’t skim off the top
- Commandment #2 – don’t have a team
- Commandment #3 – don’t be part of a team
- Buffett does his own investment research with no team
- Investing is not really a team sport
“In general, when you have multiple people involved, one of the issues you get to is circle of competence. Every person has a different circle of competence.”
How have you applied your investment philosophy to philanthropy through the Dakshana Foundation?
- For philanthropy to work well, you definitely need a great heart, but you also need a great head.
- Most of the people who run these organizations have never allocated capital, or thought about return on capital.
- We don’t look at return on capital as such at Dakshana, but we do look at the social return on capital. Which is quantifying impact to maximize the impact of our investments.
Has the growth of online research tools at all changed your research process? More generally, how has technology impacted your investment career?
- I don’t use a lot of online tools. I mostly rely on public disclosures that have been made by companies, and I take it from there and run from there.
What is the most contrarian current position you hold? Why is the market wrong?
- Fiat Chrysler Automobiles, it’s approximately 30% of the portfolio. It’s a large position. We’ve held the stock for 6 years now. And in the last 6 years, it has delivered about a 7-8x return to us, which is quite satisfactory.
- The interesting and unusual thing about Fiat Chrysler is that they tell you what their future long term earnings and cash flows will be. For example in 2014, the company gave very precise guidance on what their 2018 earnings would be.
- The interesting thing is that in 2018, just a few weeks ago, Fiat again precisely told us what they would deliver in 2022. And if you look at the forecasted 2022 numbers, in effect Fiat Chrysler is trading at two times earnings. From my perspective, that is really good for something that is 30% of our portfolio. I don’t think that in 2022 it will trade at two times earnings. I think it will trade at a significant multiple of that.
- The best investments are the ones that are the biggest no brainers.
What is the most contrarian part of your investment philosophy?
Nobody agrees with me on at least two things. They don’t agree with me on team size, and they don’t agree with me on skimming off the top.
What names other than Fiat Chrysler are you currently looking at? Anything particularly interesting?
- India – It’s not as developed of a market as the US, there are a lot more inefficiencies. I think that when you have high growth there is a higher probability of mispricing.
- So I find that India has a lot of tailwinds. It’s embryonic in a number of different industries, and is a bit like venture investing, where you’re looking at industries that are very very early in their development.
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