Mohnish Pabrai

Last Friday shares in Horsehead Holdings Corp crashed by more than 91% after a judge approved the company’s Chapter 11 bankruptcy restructuring, bringing an end to months of uncertainty for the business and shareholders.

Horsehead filed for Chapter 11 protection in February, listing $421 million in secured and unsecured debt obligations and ever since the filing the producer of zinc and nickel products has faced a barrage of criticism and accusations of foul play from its shareholders. Shareholders now claim that Horsehead is lowballing the value of its assets to let creditors gain control of the company at a bargain price.

According to Gretchen Morgenson of The New York Times, at the beginning of 2016 Horsehead was valuing its assets at around $1 billion, six months after this valuation the company was estimating the value of its assets to be around $300 million — even for a commodity company this drop in value a staggering. As explained in the article and the company published in the New York Times at the end of August:

“But in a July filing with the court, Horsehead’s financial adviser said the company’s assets were worth an estimated $280 million to $375 million. The main reason for the decline? The company’s decision to write down to almost zero the new zinc plant in Mooresboro it built for $550 million.”

The problems with Horsehead’s Mooresboro mine are well known and even equity holders seem to agree that the assets are not worth much (as explained below)

Back in 2011 Horsehead decided to transition zinc production from its 80-year old smelter to using a different chemical process to produce zinc. The new plant was expected to cost about $350 million and increase EBITDA by as much as $110 million making the company one of the lowest cost zinc producers on the planet. Unfortunately, the company completely failed to manage this project effectively. Costs spiralled to $500 million and after 18 months of operation, the plant could only manage 25% capacity. The final death blow for the company came when it announced that the new smelter needed another $100 million to cover losses while the plant ramped up to full production.

god father horsehead photo — Photo by miss.libertine A horse head that won’t wipe you out.

Photo by miss.libertine A horse head that won’t wipe you out.

Mohnish Pabrai and the Horsehead Holdings catastrophe

Mohnish Pabrai’s Pabrai Funds are one of the largest investors in Horsehead’s equity and until the beginning of this year, the position had generated impressive returns for Pabrai’s investors. As I wrote earlier this year:

“Horsehead Holdings was originally acquired by the funds back in 2008 as a traditional Benjamin Graham investment. At first, the stock produced a great return of the fund appreciating by over 400% in less than 13 months. And after conducting further due diligence on the company, Pabrai became impressed with Horsehead’s management and continued to hold the company even after its impressive gains.”

Pabrai Funds Crushed, Down 20% In 2015 Thanks To Horsehead

The Pabrai Funds acquired over 4.9% of Horsehead’s outstanding shares and the company’s troubles have cost Pabrai’s investors years of positive returns. According to the Pabrai Investment Funds’ Q2 first half letter to investors a copy of which was reviewed by ValueWalk, Pabrai’s leading fund is down 17.7% for the first half of 2016. Last year, the fund returned -30% for investors as Horsehead’s troubles started to play out.

Horsehead Holdings – Pabrai on mistakes

Pabrai ends off the Horsehead Holdings section stating:

Was the Horsehead investment a mistake? Well, the original bet was not a mistake. The mistake was buying over 4.9% of the shares outstanding. In the last 16+ years at Pabrai Funds, we have bought over 5% or even over 10% of a few public companies. In no cases have we ever ended up with a winner. It is a small data set, but there are obvious reasons why going over 4.9% is dumb. Buying over 10% makes us subject to a variety of insider disclosure rules. Going over 5% requires us to make a 13G filing. All these Form 4 and 13G filings not only add cost and administrative time, but they also make it hard to increase or decrease position size.
If we owned less than 4.9% of Horsehead, it is almost certain we would have done tax loss selling in 2015 at significantly higher prices – and decided not to buy it back based on all the updated current facts. We are going to endeavor to never ever go over 4.9% anymore on any stock in the US. Been there. Done that. Got the T-shirt.One can make mistakes in investing and end up with a profit (e.g. Chesapeake). Or you can lose money and the bet would still have been the right one to make. If the odds of tails in a coin toss is 75% and pays 1:1, it is a very worthwhile bet to make, even though there is a 25% chance you lose the bet. We are going to lose some, even when we are ultra-vigilant and prudent. It is the nature of the game. With Horsehead, just 6 months ago, things looked benign. zinc prices were decent and the best information management had was that they had sufficient runway to get the new plant to 100% capacity and be generating nearly $200 million a year or more in EBITDA.

But we ended up with a trifecta of low probability events in unison. They ran into very significant ramp-up difficulties on a proven process, at the same time zinc prices collapsed to levels not seen since the financial crisis. Nickel prices have collapsed to a multi-decade low. All of these decreased profitability and increased the need for cash at the very same time that their liquidity was becoming quite stressed. Looking back at all the available information, I would still have made the investment (though we’d have maxed out at $35 million invested).

It is hard to predict where we end up with Horsehead, but the prospects are not good. They do have a wide range of assets whose value exceeds the company’s liabilities, but if there is a restructuring, assets like INMETCO and Zochem may be sold at fire-sale prices and restructuring costs themselves may be significant. In addition, it is unknown when the new plant will be profitable or when zinc prices may recover. The good news is that we have taken nearly all of the pain. There are no plans to add to our position. Even with a 100% loss on Horsehead, Pabrai Funds has plenty of other great irons in the fire and we expect to do quite well in the years ahead.

These Horsehead Holdings losses have cost investors years of returns. For example, $100,000 invested in Pabrai’s leading fund at inception on

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Two Key Checklist Items by John Huber

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I am not a big fan of going through specific “checklist” items one by one when evaluating an investment idea. I know this idea has gained enormous popularity in recent years, partly due to the good book The Checklist Manifesto, and partly popularized in value investing circles by Mohnish Pabrai.

I respect Mohnish a lot, and I think his idea of evaluating previous investment mistakes (both his own mistakes and especially the mistakes of other great investors) is an excellent exercise.

Checklist

One investment mistake to study would be Pabrai’s own investment in Horsehead Holdings (ZINC). This investment would be a case study that maybe I’ll put together for a separate post sometime, as it’s one that I followed during the time he owned it. There are a few reasons why I always scratched my head at why he bought ZINC, and there are a few reasons why I think it ultimately didn’t work, but one thing I’ll point out is what Buffett said in his 2004 shareholder letter (thanks to my friend Saurabh Madaan who runs the Investor Talks at Google for pointing me to this passage):

“Last year MidAmerican wrote off a major investment in a zinc recovery project that was initiated in 1998 and became operational in 2002. Large quantities of zinc are present in the brine produced by our California geothermal operations, and we believed we could profitably extract the metal. For many months, it appeared that commercially-viable recoveries were imminent. But in mining, just as in oil exploration, prospects have a way of “teasing” their developers, and every time one problem was solved, another popped up. In September, we threw in the towel.

“Our failure here illustrates the importance of a guideline—stay with simple propositions—that we usually apply in investments as well as operations. If only one variable is key to a decision, and the variable has a 90% chance of going your way, the chance for a successful outcome is obviously 90%. But if ten independent variables need to break favorably for a successful result, and each has a 90% probability of success, the likelihood of having a winner is only 35%. In our zinc venture, we solved most of the problems. But one proved intractable, and that was one too many. Since a chain is no stronger than its weakest link, it makes sense to look for—if you’ll excuse an oxymoron—mono-linked chains.”

This sounds very similar to the problem that Horsehead Holdings (ZINC) had with its zinc facility in North Carolina. Without going into details, I think there were too many variables that needed to go right for ZINC to work out as an investment.

But let me just say that mistakes are part of investing. So many people are so quick to cast judgment on investors like Pabrai, David Einhorn, or Bill Ackman when they make big mistakes. I’m not apologizing for these investors, but I think that those who are criticizing these investors should look at their entire body of work to draw conclusions, not just one bad investment. These three are very good investors with outstanding long-term records that have vastly exceeded the S&P 500, and they should be judged on that record, not the underperformance of the past couple years.

But regardless of what you think of these investors, it helps to try and learn from their mistakes. I wrote a post on Valeant a while back, which is Ackman’s biggest error. I also looked at SunEdison, which was an Einhorn investment. It is infinitely easier in hindsight (the rearview mirror is always clear) to attribute reasons for why these investments didn’t work out, but nevertheless, I think it’s helpful to study these mistakes.

I don’t think a 100-point checklist would have been necessary to pass on any of these three investments (ZINC, VRX, or SunEdison). Two of the three companies were ultra-focused on growing revenue regardless of the return on capital associated with that growth, using the so-called “roll-up” approach. All three of these investments saw their losses dramatically accentuated by debt.

I think each of these investments hinged on a few key variables (in addition to debt), and I think rather than running through a generic “pre-flight” checklist, a better method is to have a few very broad checklist items, and then determine the key variables that really matter regarding the business in question.

What do I mean by “broad checklist items”? One general checklist that Buffett and Munger use:

Do I understand the business?
Is this a good business? (Competitive advantages, high returns on capital, etc…)
Is management competent and ethical?
Is the price attractive?

It doesn’t get much simpler than that, and I think this 4-point filter is a common denominator that could be used on just about every investment.

Obviously, there is a lot of thought and analysis that goes into answering those simple questions, and so there are sub-categories that might pop up.

Key Checklist/Concept #1

This isn’t really a checklist item. But it’s a takeaway I’ve had through my own experiences:

Whenever I find myself getting more attracted to the security than I am to the business, it’s often a good reason to pass

My mistakes have almost always come from investing in “cheap” stocks of subpar businesses. I’ve learned that I’m better off focusing on good businesses. This means missing certain opportunities, but for me, it also means reducing errors. Also, when it comes to managing other people’s money at Saber Capital Management, I don’t feel comfortable owning low-quality businesses, regardless of how attractive the valuation appears to be. I mentioned this on Twitter recently and it sparked some interesting discussions.

There are a number of investors who disagree with me on this point. Some investors make a lot of money buying crappy businesses that are beaten down to really cheap valuation levels. It’s possible to make excellent returns buying garbage that no one else wants and selling them when the extreme pessimism abates some. This is the approach that guys like Walter Schloss used to great success in the 1950’s-1970’s—the so-called “cigar butt” style of investing.

But I think one big difference between the cigar butts of yesteryear and the stocks that investors get attracted to today is the debt levels on the balance sheet. The cigar butts that I read being pitched today are often questionable businesses that are loaded with debt. If things turn around and the company survives, the equity can appreciate multiples from its current level. If not, the company goes bankrupt and the equity gets wiped out.

It’s possible to become very good at handicapping these types of situations, but it’s not my style of investing. I choose to pass on these overleveraged companies with minimal chances of success.

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Low Probability, High Payoff Investment Ideas

This brings me to another point I want to make regarding estimating probabilities. I read investment pitches all the time that discuss the probability of various outcomes. This makes sense—Buffett himself has talked about assigning probabilities to various outcomes of an investment. And certain odds might tell you that even a low probability event can be a very good bet to take. For example, a

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Circle Of Competence by Investment Master Class

“It makes sense that if you limit your investments to those situations where you are knowledgeable and confident, and only those situations, your success rate will be very high.” Joel Greenblatt

“If we have a strength, it is in recognizing when we are operating well within our circle of competence and when we are approaching the perimeter” Warren Buffett

“When I stray out of my comfort zone I usually get my head handed to me on a platter” Peter Cundill

“If you know nothing about at area and haven’t studied the companies and the sector, stay away from it” Roy Neuberger

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Circle Of Competence

“The game of investing is one of making better predictions about the future than other people. How are you going to do that? One way is to limit your tries to areas of competence. If you try to predict the future of everything, you attempt too much.” Charles Munger

“Dealing in a circle of competence, dealing with companies that you have the ability to understand, being able to come up with a good analysis of a company’s value and earning power, is fundamental.” Lou Simpson

If you have competence, you pretty much know it’s boundaries already. To ask the question [of whether you are past the boundary] is to answer it. Charlie Munger

“You have to know what you know—your circle of competence.” Joel Greenblatt

“Don’t try to be a jack of all investments. Stick to the field you know best” Bernard Baruch

“If we can’t find things within our circle of competence, we won’t expand the circle. We’ll wait” Warren Buffett

"Knowing you don’t know something is nearly as valuable as knowing it. The worst situation is thinking you know something when you don’t" Ray Dalio

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“Investors who confine themselves to what they know, as difficult as that may be, have a considerable advantage over everyone else” Seth Klarman*

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“Most businesses that I look at are typically rejected within two or three minutes or even less. They are rejected in two or three minutes for one of two reasons – they are either outside the circle of competence or the quick look at the price, market cap and such doesn’t make it interesting. They either are things that I don’t understand or they are things that don’t seem to be cheap by any measure that I would have an interest in.” Mohnish Pabrai

“You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.” Warren Buffett

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"One of the lessons I took from Warren Buffett years ago was to define areas you're comfortable with and stick to them" Thomas Russo

"Circle of competence essentially comes down to whether we understand the business. There are several sub-questions under than; Do we know the right people in the industry? How well do we understand the products and customer decision making process? Are there unanalyzable things that could have a big impact?" James Chrichton

"The most important thing in terms of circle of competence is not how large it is but how well you define the parameter. If you know where your edges are, you are way better off than somebody who has a circle five times as large but is very fuzzy about the border" Warren Buffett

"It's not how big your circle of competence is - it's more about how well you know the stuff in your circle" Mohnish Pabrai

"You have to be an expert in what you invest in. You need to understand why you are invested. If you don't understand why you are in a trade, you won't understand the right time to sell, which means you will only sell when the price action scares you. Most of the time when the price action scares you, it is a buying opportunity, not a sell indicator" Martin Taylor

"Investors stumble when they get bull-headed or when they shift to doing something that is outside of their core competencies" Sam Zell

"A policy judgement that was wrong for me engendered quite a different kind of mistake, and one which did cost a significant amount of dollars. My mistake was to project my skill beyond the limits of experience. I began investing outside the industries which I believe I thoroughly understood, in completely different spheres of activity; situations where I did not have comparable background information.. An analyst must learn the limits of his or her competence and tend well the sheep at hand" Phil Fisher

"The beauty of the stock market is that it gives us the luxury to avoid sectors and/or businesses that are outside our circle of understanding" Mohnish Pabrai

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The Pabrai Funds – the hedge funds managed by value investor Mohnish Pabrai — have sprung back into life during the third quarter of 2016 after several quarters of underperformance. The three funds were up between 14.4% and 15.8% in the last quarter – meaningfully better than all three indices. Year-to-date the funds are down between 9% and 5.5% and last year the funds lost between 30% and 15%, according to a third quarter letter to investors reviewed by ValueWalk.

All of Pabrai’s losses of the past two years can be traced back to one position: Horsehead.

Also see

Pabrai Funds and Horsehead

Horsehead filed for Chapter 11 protection in February, listing $421 million in secured and unsecured debt obligations. At the beginning of September shares in the company crashed by more than 91% after a judge approved the company’s Chapter 11 bankruptcy restructuring, bringing an end to months of uncertainty for the business and shareholders.

The Pabrai Funds owned over 4.9% of Horsehead’s outstanding shares at the height of its ownership. For more on the Pabrai/Horsehead debacle click the links below.

Pabrai Funds Mohnish Pabrai horsehead — Photo by miss.libertine

Looking to the future

Pabrai isn’t one to dwell on mistakes and now the Horsehead issue is behind the firm, the respected value investor is looking forward to the future. Indeed, in his third quarter letter to investors of the Pabrai funds, Mohnish writes:

“With the substantial discount to underlying intrinsic value, I believe our portfolio is like a tightly coiled spring. While there are no guarantees, all three funds are likely to do quite well in the next few years. “

He continues:

“We’ve added some very nice assets to the portfolio in 2016 at significant discounts to underlying intrinsic value. In addition, we have the finest collection of managers we’ve ever had running the fractions of businesses that we own.”

Unfortunately, Pabrai does not give any hints as to the identity of these businesses but considering his record of outperformance and deep value slant, they’re likely to be severely undervalued with the potential for enormous growth ahead.

A $100,000 investment in PABRAI INVESTMENT FUND at inception on July 1, 1999 and rolled over into PIF2 on 12/31/02 ($197,900) was worth $841,000 as of September 30, 2016 (net to investors). This equates to an annualized return of 13.1% since inception – after all management fees and expenses. The best index over the same period was the Dow and an investment of $100,000 in the DJIA on July 1, 1999 was worth $251,200 on September 30, 2016 – an annualized gain of 5.5%.

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“Volatility caused by money managers who speculate irrationality with huge sums will offer the true investor more chance to make intelligent investment moves. He can be hurt by such volatility only if he is forced, by either financial or psychological pressures, to sell at untoward times” Warren Buffett

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"This great emphasis on volatility in corporate finance we regard as nonsense" Charlie Munger

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“Opportunities to purchase what we deem to be attractively undervalued companies occur more frequently when stock prices are volatile.” Chuck Royce

“We steer clear of the foolhardy academic definition of risk and volatility, recognizing, instead, that volatility is a welcome creator of opportunity” Seth Klarman

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“Risk is not defined by volatility, but rather ill-conceived investment” Michael Burry

Volatility

"Volatility is not synonymous of risk but – for those who truly understand it – of wealth" Francois Rochon

"We do not view volatility as risk" Tweedy Browne Co

"Investors should treat volatility as a friend. High volatility permits an investor to purchase stocks that are particularly depressed and to sell stocks when they are selling at particularly high prices. The greater the volatility, the greater the opportunity to purchase stocks at very low prices and then sell stocks at very high prices" Ed Wachenheim

“We think short-term volatility should often be viewed as an opportunity to the long-term investor who seeks enduring businesses at reasonable prices” Christopher Begg

“We are willing to endure a high degree of stock price and portfolio volatility because we believe it allows us to achieve a greater degree of investment performance over the long term” Bill Ackman

“The true investor welcomes volatility” Warren Buffett

"Volatility actually is the opposite of risk. It’s is opportunity. But you need to think through and fight some basic human weaknesses.” Jeff Ubben

"I have never thought of volatility as a measure of risk. The investment business tends to think there is some correlation between volatility and risk and I don't think that is true. We are not concerned with price fluctuations and to the extent that the price drops, we can take advantage of that and can buy more of the same thing" Mohnish Pabrai

“You can get lulled to sleep when markets haven’t been volatile, which likely means it’s time to take some chips off the table” Kevin O’Brien

"Not only doesn't a stock's past price volatility serve as a good indicator of future profitability, it doesn't tell you something much more important - how much you can lose. Let's repeat that: It doesn't tell you how much you can lose. Isn't risk of loss what people most care about when they think of risk?" Joel Greenblatt

“There are many kinds of risks .. But volatility may be the least relevant of them all” Howard Marks

“If you make more money when you are right than you are hurt when you are wrong, then you will benefit, in the long run, from volatility [and the reverse]” Nicholas Taleb

“You can’t overlook the volatility, but you don’t let it push you around in the market” Boone Pickens

“Volatility is the friend of the unleveraged long-term investor. We much prefer the bumpy road to higher rates of return than a smoother rise to more modest profits” Bill Ackman

"Most investors incorrectly consider volatility to be a risk. These investors thus demand a higher return from common stocks than the deserved return. This error is our opportunity - this is another reason we treat volatility as a friend" Ed Wachenheim

“Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.” Warren Buffett

“One of the great lessons on the crisis was learning the difference between volatility, which most people perceive as risk, and a permanent impairment of capital, which is what we believe is risk” Matt McLennon

“While many investors think of volatility as synonymous (or nearly so) with risk, we take a different view. Rather than avoid volatility, we see the challenge of managing risk as trying to take advantage of the market’s movements—an essential skill for any successful active manager.” Chuck Royce

“Risk is a far more complex consideration than merely the simple but widespread notion of volatility” Paul Singer

“Pick any Company you want – the price is very volatile over short periods of time. It does not make sense to me that their values are nearly as volatile as the prices and therein lies what should be a great opportunity” Joel Greenblatt

"Volatility is our friend. Volatility has nothing to do with risk" Mohnish Pabrai

"Volatility is terrific. What we don't want is the permanent loss" Wally Weitz

"If we insist on a significant margin of safety at the time of purchase, above-average volatility may well provide above-average returns. Rather simple, when you ponder it a while" Frank Martin

"I think volatility is so widely used as a risk-metric simply because it is easy to measure, not because it is a good gauge of risk of permanent loss of capital. Downside volatility is merely one aspect of risk, not necessarily the most important, while upside volatility isn't much of a risk at all - unless you are short" Joel Greenblatt

"Another important point: the significant volatility of the market is often perceived negatively by many investors. It’s actually the contrary. When we see stock prices as “what other people believe the company is worth” rather than the real value (at least in the short term), these fluctuations become our allies in our noble quest for creating wealth. Instead of fearing them, we can profit from them by acquiring superb businesses at attractive prices." Francois Rochon

“I certainly view volatility as my friend. Volatility is on sale because 99% of the institutions out there are doing their best to avoid it.” Michael Burry

"Financial academics define risk as volatility. That may be fine for theory, but for those of us who live in the real world, we define risk as permanent loss of capital. The likelihood of risk using our definition is always highest at the point where the general perception of risk is lowest" Christopher Bloomstran

"When people do try to measure investment risk, they typically assess the historic volatility of an investment compared to that of the overall market (known as beta), which derives from capital asset pricing theory. We consider the concept of beta to be irrelevant, both because volatility is not the same thing as risk and because one cannot reliably project past share price patterns into the future. (It is, of course, fortunate for us that others remain so misguided.)" Seth Klarman

"If you want to start talking volatility equals risk, sharpe ratios, beta and gamma, the Greek alphabet, we're not a good match for you" John Phelan

"Volatility is not part of our analysis of risk; rather we view it as an opportunity generator. What we say for our purposes is that risk involves the exposure of permanent loss of capital" Chuck Akre

"In the first place it has been known for decades that there is no correlation between risk, as the academics define it, and return. Higher volatility does not give better results, nor lower volatility worse. Volatility is not risk. Avoid investment advice based on volatility" David Dreman

"How can professors spread this [nonsense that a stock's volatility is a measure or risk]? Ive been waiting for this craziness to end for decades. It's been dented, but it's still out there" Charlie Munger

"Because we focus on value instead

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“Never invest in a business you cannot understand.” Warren Buffett

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"First understand the business and then understand the stock" Mario Gabelli

"What I want to do is understand the business" Marty Whitman

Understand

“If you understand the business, you ought to know what the business is worth. If you don’t understand the business then you probably wouldn’t know how to value it” Mohnish Pabrai

“If the estimation of intrinsic value is deemed substantially unreliable, there is simply no way to determine the extent to which the current market price affords a margin of safety” Frank Martin

“If you get into some complicated business, you can get a report that’s 1,000 pages thick and you can have Ph.D’s working on it. But it doesn’t mean anything. What you’ll have is a report. But you won’t have any better understanding of that business and what it’s going to look like in 10 or 15 years. The thing to do is avoid being wrong” Warren Buffett

“If we don’t know what something is worth, how can we possibly determine whether the price is cheap or expensive?” Frank Martin

“Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now.” Warren Buffett

“We like businesses that are simple to understand and simple to discuss” Larry Robbins

"First and foremost may sure they [you] really understand what the company does at a very simple level. So, for example, who buys from the company, Why does a customer buy from the company? Why does a customer fire this company and buy from a competitor? and vice versa: Why do they fire a competitor and move on to buy from this company? If we took at a company like Hershey's Chocolate, you'd be able to answer that question easily. If we took a company with complicated software or business processes or other things that maybe aren't clear to people in the field it is less obvious, right? So, first and foremost, I think people need to have a very good basic understanding of why it is that the company exists and what customer base do they serve? And what do they offer the customer base that their competiors don't? Trying to get to the concept of, what is this company's advantage? And if you can't define very simply what this company's competitive advantage is, I think that's really a qualifying first step" Ken Shubin Stein

"Fortunately, I never invested much money in things I didn't understand" Peter Lynch

"No one should ever buy a stock without knowing as much as possible about the company that issues it" J Paul Getty

"We focus on good businesses we understand because it makes everything easier" John Fox

“The advantage of low-tech stuff for us is that we think we understand it fairly well. The other stuff we don’t. And we’d rather deal with what we understand” Charlie Munger

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“We try to stick to businesses we believe we understand. That means they must be relatively simple and stable in character” Warren Buffett

“I look for great companies in businesses I understand and which I believe have competitive advantages” Francois Rochon

“I will not abandon a previous approach whose logic I understand even though it may mean foregoing large and apparently easy, profits to embrace an approach which I don’t fully understand, have not practiced successfully and which, possibly, could lead to substantial permanent loss of capital.” Warren Buffett

“First and foremost, we’re trying to understand the business” Lee Ainslee

"The first thing, is it an easily understandable business" Kevin Daly

"Investing is tough enough when you think you know something. When you have to start guessing, forget it." Bruce Berkowitz

“The most important thing in investing is to know what you’re invested in, and if your confident in the outcome it’s important to stay true to your position” John Paulson

"We are seeking a level of Mastery in understanding the fundamental truths that enable a business to earn superior returns, with a healthy margin of safety over the longest duration possible" Christopher Begg

"I need to get a general understanding of what a business does in a few minutes. If I cannot generally grasp how it makes money and how it works in I would say the first 30 minutes, then in general I am wasting my time. I may not understand all the intricate details but I should at a high level understand" Mohnish Pabrai

"I first try to understand if it's a good business. Then, if I don't understand the business, can I do the work to understand it. Those are the key things we think about first" Jeff Gramm

"I like businesses that I can understand. Let‘s start with that. That narrows it down by 90%. There are all types of things I don‘t understand, but fortunately, there is enough I do understand." Warren Buffett

"The source of a business' strength may not always be obvious. Therefore, understanding that first leg of the stool, the business model, has its own level of difficulty. It's also where the fun is, I might add, and we believe it is absolutely critical" Chuck Akre

"I think that in order to be a great investor, it's very helpful to understand business and how to run a business" Bill Ackman

"You have to be an expert in what you invest in. You need to understand why you are invested. If you don't understand why you are in a trade, you won't understand when it is the right time to sell, which means you will only sell when the price action scares you. Most of the time when price action scares you, it is a buying opportunity, not a sell indicator" Martin Taylor

"I like to stick to businesses we understand and for which there is an ongoing need. If there is something you do not understand or are not comfortable with, in the no-thank-you pile it should go" Chris Browne

"Investment must be rational; if you can't understand it, don't do it" Warren Buffett

"The further you stray from stocks you really understand, the more likely you are gambling rather than investing" Ralph Wanger

"The key thing is when the stock goes from 10 to 6, if you understand what they do and you know they're financially solvent you're fine. But if you don't understand it you'll probably going to do the wrong thing. You know if you understand exactly what they're doing it's gone 10 to six you'll buy more. If you're confused to start with you'll say well there must be something wrong here. And then you're out" Peter Lynch

"I would rather stay away from businesses that I don't understand. When I say I don't understand I mean I do understand what a certain business does and how it makes money, but I don't understand what it will look like in the next five to ten years. When I say that I understand a business I mean I have a reasonable fix on the earning power of the business in five or ten years - so I've got some notion on how the industry will evolve and where the company will sit in the industry in the future" Warren Buffett

"Understand the nature of the companies you own and the specific

The post Understand appeared first on ValueWalk.

Prof. Jiang Guohua’s Value Investing Course. “The Quest for 10-100 Baggers”

Mohnish Pabrai Lecture at Peking University (Guanghua School of Mgmt) – Oct 14, 2016

The post Mohnish Pabrai Lecture At Peking University – Oct 14, 2016 appeared first on ValueWalk.

Sales/Marketing Reading Materials Referenced in Mohnish’s Presentation

Marketing High Technology by William Davidow
Power vs. Force by David Hawkins
Strategic Selling by Miller/Heiman
Conceptual Selling by Miller/Heiman
Successful Large Account Management by Miller/Heiman
The Origin and Evolution of New Businesses by Amar Bhide
Inc. Magazine Subscription
In Search of Excellence by Tom Peters
Ogilvy on Advertising by David Ogilvy

Also see Tesla Is “Blowing Billions” On “Dumb” Ideas: Pabrai

Mohnish Pabrai Talk at TiE SoCal (Irvine, CA) on Marketing & Branding – Feb 24, 2014

The post Mohnish Pabrai Talk at TiE SoCal On Marketing & Branding – Feb 24, 2014 appeared first on ValueWalk.

I very much enjoyed this interview with Indian business news channel, ET NOW.

H/T Value Investing World

Also see

Pabrai Funds Springs Back After Horsehead

Punita Kumar Sinha In Conversation With Mohnish Pabrai

I didn’t realize they’d print it as well!

Trump may be the very best thing that happened to the US and the world: Mohnish Pabrai, Investor & Philanthropist

In a chat with Punita Kumar Sinha of ET Now, Mohnish Pabrai, Investor & Philanthropist, says President-Elect Trump understands quite a bit about the way business and the economy works. He is definitely better than presidents who have never run a lemonade stand in their lives. Edited excerpts.

There is a view that President Trump is going to introduce a lot of stimulus into the economy, he is going to shut down immigration and that will be good for manufacturing in the US. But this could also be inflationary and there could be wage pressures. So yes while whether McDonalds serves for 12 hours or 24 hours is more important but then their costs might change by certain actions of the president. What is your take on what President Trump might do that will affect businesses in the US?

I was not much of a fan of candidate Trump, I am a bigger fan of president-elect Trump. This is a global phenomenon. We see that in India, we see that in the US. While he was a candidate he said he was going to get rid of Obamacare, now he is walking that back.

Though I did not vote for him, as I analyse the way info is unfolding, I believe Trump election may be the very best thing that happened to the US and the world. The reason I say that is because it is very likely that he is a one-term president, it is very likely that he is not going to seek another term when he is 74 years old and he is not in there for anything else other than legacy. We have had a number of presidents in the past in the US who have never run lemonade stands and I actually happen to believe that the experience one gets from running a lemonade stand can be quite useful in running a country.

Read the full article here: economictimes.indiatimes.com

And here is a shorter excerpt from the interview:

http://economictimes.indiatimes.com/et-now/experts/Mohnish-Parbais-long-term-investment-strategy/videoshow/55474553.cms

Enjoy!

Via The Compounders

The post Mohnish Pabrai – Interview with ET NOW On Trump, Demonetization And Value Investing appeared first on ValueWalk.

Distinguished Speaker Series Lecture and Q&A with Mohnish Pabra “The Quest for 10-100 Baggers,” Value Investing Course (1st Ever in China)

Pabrai Funds Springs Back After Horsehead

Tesla Is “Blowing Billions” On “Dumb” Ideas: Pabrai

Mohnish Pabrai – The Quest For 10-100 Baggers

Transcript

Mohnish Pabrai: It’s a true pleasure and honor to be invited to speak to the students and obviously Peking University amongst the best of the best. And I saw a few of the resumes and they look exceptional. We’ve got lots of horsepower in the room which is great. Behind me is a bust of Charlie Munger. Charlie will be overseeing the proceedings for the next couple of hours, so in case we go off track he’ll get us right back on track.

The topic for today is the quest for 10 to 100-baggers This term, 100-baggers, comes from Peter Lynch. It means making 100 times on your investment or making 10 times on your investments. If you say 10-baggers it’s 10 times, 100-baggers is 100 times. I haven’t given this talk before which is always a lot of fun for me because it’s very boring if I have to repeat some talk that I’ve already given before. In some ways, you guys are guinea pigs but in other ways, I think it’ll be exciting. And because I’ve not given the talk before, I’m not entirely sure of the timing, but I’m going to try to move this along because there’s a lot of material. It’ll feel like it’s going pretty quickly but that’s why we have the recording – so later you can watch it more at your leisure if you want to at certain parts. But also certainly during the Q&A we can go through things that you have an interest in.

I started my journey as a value investor 22 years ago, and I quite by accident heard about Warren Buffett for the first time. Unlike you, when I heard about him, I was 30 years old so I was much older. When I read about him I was really stunned. I haven’t been to business school. I’m an engineer by training. All of you probably know a lot more about finance than I do. But I was really stunned with Warren Buffett’s approach and the way he had been so successful. And the crux of his success, at least what I took away from what I read in 1994, was a quote by Albert Einstein which is, “Compounding is the 8th wonder of the world.” Even though Einstein was a physicist, he actually figured out a few things about compounding. And obviously, in ’94 when I had read about Buffett, he had been compounding at the rate of about 25%, 26% a year. And 26% is a magical number. I thought of the magical number then because if you compound money at 26%, it doubles in exactly three years. If you have $1,000 and you compound at 26%, you’re going to have $2,000 in three years and so on. And if you go for 30 years that’s 2 to the power of 10. And this group doesn’t need me to tell you that 2 to the power of 10 is 1,024.

Throw away the 24 and it’s 1,000 times your money. If you had $1,000 and you compound it at 26%, 30 years later you would have $1 million. If you had $1 million and you compound it at 26%, 30 years later you’ll have $1 billion. That’s basically the key to Buffett’s success. I thought it was worth trying to do what Buffett did. Of course, there’s no way that we’re going to have another Warren Buffett. But I thought it was worth trying to compound at high rates. Gradually over five years, I switched from being a CEO of an engineering company to eventually being a hedge fund manager. The key nuance, or you can say mental model I used was very simple. I looked for companies that were selling for half or less than what they were worth in two or three years. So if I could find a dollar bill for 50 cents then what that meant is that if it got valued as a dollar in two years or three years I would be compounding at 26%, and if it happened in two years, it would be even higher. It’d be like 35%, 36%. So I said it’s worth trying to seeing if we can find these 50 cent dollars because 26% sounds high. I didn’t think it was that hard to find things that are half off in an auction driven market, and I thought it was worth trying because the rewards are so high. That’s what I embarked on doing. I said, “Okay, let’s try to find these dollar bills for 50 cents.” And then you just sit back and wait for two years or three years. Markets are a weighing machine in the long term and they’ll get reweighed accordingly. And for the most part, if I look at my performance from ’95 until let’s say 2014, it’s done about the 26% approximately. The last two years I’m down about one-third, so we were taken down a little bit. But we think in the next few years we’ll make it up. We’ll see how it goes. I’ll report to you next year when I’m with you in-person.

Read the full transcript below.

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Article by Investment Master Class

“The best way to minimize risk is to think” Warren Buffett

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"The linchpin of our philosophy is to think critically about risk, especially low-probability risks. Our old fashioned style embraces humble skepticism and is wary of most modern risk management tools and ideas (i.e. broad diversification, financial models, derivatives, etc). Our concern is such tools and ideas can act like mental shortcuts and subtly diminish one’s appetite for critical thinking." Allan Mecham

Business Failure — Image credit: Investment Master Class

“If we put our head in the lion’s mouth, we shouldn’t be surprised if it’s bitten off” Peter Bevelin

"Risk never looks like risk when it’s generating a high return" Howard Marks

“Makes sure that the probability of the unacceptable (ie the risk of ruin) is nil” Ray Dalio

“Never set yourself up for the knockout punch” Kyle Bass

“Whatever you do, make sure you're around tomorrow" James Dinan

“If a gambler has a risk of terminal blow-up (losing back everything), the “potential returns” of his strategy are totally inconsequential” Nicholas Nassim Taleb

“If we can’t tolerate a possible consequence, remote though it may be, we steer clear of plantings its seeds” Warren Buffett

"I’m firmly convinced that investment risk resides most where it is least perceived, and vice versa" Howard Marks

"Paradoxically, it is exactly then, when investors don’t see any risk in a market that it becomes the riskiest. But this is usually realized later" Francois Rochon

“Our style is to try to minimize risk in every way we can, and be glad by what is left by way of return. We don’t love risk for the sake of excitement (Some people do). We think of risk as a phenomenon to be watched from afar, like some wonderfully picturesque flaming lava flow from a volcano. It looks inviting and beautiful, but it scorches, if not destroys, those who venture to close.” Paul Singer

“Especially in good times, far to many people can be overheard saying “riskier investments provide higher returns. If you want to make more money, the answer is to take more risk”. But riskier investments absolutely cannot be counted on to deliver higher returns. Why not? It’s simple; if riskier investments reliably produced higher returns, they wouldn’t be riskier!” Howard Marks

“At every turn of economic life, the reduction of risk is the key to prosperity. Except in financial markets? Why should it be so?” Andy Redleaf

“Eliminating risk is preferable to finding out where the risk lies” Peter Bevelin

“Investors are paid for being right, not for the possibility of being wrong?” Andy Redleaf

"You can get paid generously for perceived risk, but you don't necessarily get paid for taking real risk." Wilbur Ross

“I put heavy weight on certainty .. if you do that, the whole idea of a risk factor doesn’t make any sense to me. You don’t do it where you take a significant risk. But it’s not risky to buy securities at a fraction of what they are worth” Warren Buffett

“Risk is not the foundation of profit but its most dreaded enemy” Andy Redleaf

“You have to be in risk management mode all the time, not just when you might be particularly nervous, because it is impossible to time the transitions of markets to crisis conditions.” Paul Singer

“We have all been taught that earning high rates of return requires taking on greater risks… If an investor can make virtually risk-free bets with outsized rewards, and keep making the bets over and over, the results are stunning.” Mohnish Pabrai

“Risk managed at all times and hedged at all times is the only way to actually control risk.” Paul Singer

“Attention to risk must be a 24/7/365 obsession, with people - not computers - assessing and reassessing the risk environment in real time.” Seth Klarman

Get The Full Seth Klarman Series in PDF

Get the entire 10-part series on Seth Klarman in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

"We think vigilance towards risk is the plow-horse to harvesting solid investment returns" Allan Mecham

“Risk control is invisible in good times but still essential, since good times can so easily turn onto bad times” Howard Marks

“Basically if you study entrepreneurs, there is a misnomer: : People think that entrepreneurs take risk. And they get rewarded because they take risk. In reality, entrepreneurs do everything they can to minimize risk. They are not interested in taking risk. They want free lunches and they go after free lunches.” Mohnish Pabrai

“In the real economy we see all the time people being paid for hard work, for perseverance, for insight, and for experience. It is easiest to see this by starting with some extreme cases. There are many great heroes among the great entrepreneurs. It is almost impossible to think of one who got paid for taking risk. The more brilliant the entrepreneur and grand his achievements, the less true it seems. Was Alexander Graham Bell paid for the risk he might not invent the telephone? Nonsense, he was paid for inventing it. Was Edison paid for the risk that he might not invent a light bulb, or for actually inventing it? Henry Ford was not paid for taking the risk he might not be able to build a car affordable to “any man of good salary” he was paid for actually doing it” Andy Redleaf

"I am sure that any competent judge would be surprised to find how little I ever risked for myself and my partners. When I did big things, some large corporation like the Pennsylvania Railroad Company was behind me and the responsible party. My supply of Scotch caution has never been small; but I was apparently something of a daredevil now and then to the manufacturing fathers of Pittsburgh" Andrew Carnegie

"The received wisdom is that risk increases in the recessions and falls in booms. In contrast, it may be more helpful to think of risk as increasing during upswings, as financial imbalances build up, and materializing in recessions." Andrew Crockett

"Any look at the prospect for all types of investments would be grossly incomplete without a careful examination of the risks that one would have to assume to be in the game" Frank Martin

"Baupost, as a long-time participant in the financial markets, has always confronted serious risks. Our ongoing response to omnipresent risks is to attempt to mitigate as much as we can, intelligently and affordably, while willingly incurring only those risks for which we are being well compensated" Seth Klarman

Get The Timeless Reading eBook in PDF

Get the entire 10-part series on Timeless Reading in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

The post Risk appeared first on ValueWalk.

Keeping Stock Valuations Simple by Investment Master Class

“In 44 years of Wall Street experience and study I have never seen dependable calculations made about common stock values, or related investment policies, that went beyond simple arithmetic or the most elementary algebra. Whenever calculus is brought in, or higher algebra, you could take it as a warning signal that the operator was trying to substitute theory for experience” Ben Graham

“Simplicity or singleness of approach is a greatly underestimated factor of market success. As soon as the attempt is made to watch a multiplicity of factors even though each one has some element to justify it, one is only too likely to become lost in a maze of contradictory implications.. the various factors involved may be so conflicting that the conclusion finally drawn is no better than a snap judgement would have been” Garfield Drew, 1941

“The reason our ideas haven’t spread faster is they’re too simple.” Charlie Munger

Get The Full Series in PDF

Get the entire 10-part series on Charlie Munger in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

Review mirror investing ray dalio — (CC) Investment Masters Class - With permission from copyright holder

“Any attempt to value businesses with precision will yield values that are precisely inaccurate” Seth Klarman

Get The Full Seth Klarman Series in PDF

Get the entire 10-part series on Seth Klarman in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

“We’d argue there’s a lot of false precision in our business and that the best investments don’t require a financial model that goes out five significant digits” Ira Rothberg

"We never sit down, run the numbers out and discount them back to net present value ... The decision should be obvious" Charlie Munger

“It is better to be approximately right, than precisely wrong” Warren Buffett

"There's no such thing as precise intrinsic value" Mohnish Pabrai

"There are so many factors involved that it is never wise to attempt to judge intrinsic value to the last eighth or even point" Phil Fisher

"Given that the future is inherently uncertain, we do not believe the value of any business can be known with certainty at a given point in time, so our aim is to be generally right as opposed to precisely wrong." Wally Weitz

"It is important to understand that intrinsic value is not an exact figure, but a range that is based on your assumptions" Jean-Marie Eveillard

"The cost of obsessing on precision is to often miss the forest for the trees" Frank Martin

“Having more information doesn’t necessarily improve decision-making. We know from studies of horse racing than when handicappers receive more information about horses and riders, they become proportionately more confident even though they are no more likely to pick the winner. When analysts have too much data, there’s a danger they won’t see the wood for the trees” Marathon Asset Management

"I’m reminded of a study which showed that as the number of variables requiring analysis increase, the odds of success decline, yet the confidence of participants soar due to extensive time and energy invested." Allan Mecham

“Using precise numbers is, in fact, foolish: working with a range of possibilities is the better approach” Warren Buffett

Get The Full Warren Buffett Series in PDF

Get the entire 10-part series on Warren Buffett in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

“When we think about intrinsic value, it is always a rough guess. In my mind, if I throw out a number to you such as “I think intrinsic value for this stock is 100,” What I’m really saying, and the way we internally use that statement is “it’s 100, give or take 10% to 15%. It might be 85, it might be 115” It’s 100 with implied error bars around the statement." Ken Shubin Stein

“Charlie and I admit that we feel confident in estimating intrinsic value for only a portion of traded equities and then only when we employ a range of values, rather than some pseudo-precise figure” Warren Buffett

“It is easy to confuse the capability to make precise forecasts with the ability to make accurate ones” Seth Klarman

“I’ve found most of our investments I can summarize in a sentence” Glenn Greenberg

" The truly big investment idea can usually be explained in a short paragraph" Warren Buffett

“Keep it simple. Your thesis should be on the back of a postcard if it’s right.” Bruce Berkowitz

"When I invest in a company, I like to be able to explain it to my children in a single sentence." Robert Vinali

“In depth information does not mean indepth profits” Dave Dreman

"In general, I haven't run spreadsheets and I find that, if there is a need to run a spreadsheet, that is a red flag to take a pass" Mohnish Pabrai

“Never invest in any idea you can't illustrate with a crayon” Peter Lynch

“Conservative forecasts can be more easily met or exceeded. Investors are well advised to make only conservative predictions and then invest only at a substantial discount from the valuations derived therefrom.” Seth Klarman

“I think analysts spend too much time building models and being myopic in they don’t spend enough time trying to take a broader perspective” Michael Karsch

“Businesses, unlike debt instruments, do not have contractual cash flows. As a result, they cannot be precisely valued as bonds” James Montier

“The essential point is that security analysis does not seek to determine exactly what is the intrinsic value of a given security. It need only establish that the value is adequate” Ben Graham

“Several difficulties confront growth-orientated investors. First such investors frequently demonstrate higher confidence in their ability to predict the future than warranted”. Seth Klarman

“An unresolved contradiction exists: to perform present value analysis, you must predict the future, yet the future is not reliably predictable” Seth Klarman.

“We can’t compensate what we can’t predict with a higher discount rate” Peter Bevelin

"We try to deal with things about which we are quite certain. You can’t compensate for risk by using a high discount rate.” Warren Buffett

“If modest changes in assumptions cause a substantial change in NPV, investors would be prudent to exercise caution in employing this method of valuation” Seth Klarman

“Investment experts continue to be convinced that their major problems could have been handled if only those extra few necessary facts had been available. They thus tend to overload themselves with information, which usually does not improve their decisions but only makes them more confident and more vulnerable to serious errors”. Dave Dreman

“The value of in-depth fundamental analysis is subject to diminishing marginal returns” Seth Klarman

“The most elegant valuation spreadsheet in the world won’t be worth much if you don’t understand and account for the bigger-picture influence on a company's business” David Iben

"I think it is not how sophisticated you are in your valuation model, but how well you know the business and how well you assess its competitive advantage. This cannot be modelled mathematically, but has more to do with the investor's own experience" Francisco Garcia Parames

"We try to avoid investing in businesses where an exogenous event can completely rewrite your spreadsheet." Gregg Powers

"There are only a few things you have to get right about a company for it to be successful investment. Our view is that if you can get 85% of the way there by answering the big questions, don't waste your time on the last 15% because the marginal utility isn't worth it" Steve Morrow

“A key rule in investing is that you don’t necessarily need to understand a lot of different things at any given time, but you need to understand the one thing that really matters” Dan Loeb

"I always try to use a no brainer test where I should be able to write down within a paragraph exactly why a particular investment will work out and what are the factors that will drive the result. I write a paragraph and keep it. If I cannot articulate in

The post Keeping Stock Valuations Simple appeared first on ValueWalk.

Compounding Machines by Investment Master Class

“The ideal business is one that earns very high returns on capital and that keeps using lots of capital at those high returns. That becomes a compounding machine.” Warren Buffett

“A compounder is a competitively advantaged business that earns superior returns on invested capital. As cash earnings are reinvested back into the business, the value of the business grows year after year compounding our investment. If we buy at a discount to what we believe the business is worth, we will benefit twofold: by the growth of the intrinsic value and the market correction for the discount. There are two key variables when we evaluate a compounder: the competitive advantage of the business and the discrepancy between intrinsic value and quoted price. Competitive advantage can be fluid and fleeting, thus having a deliberate way to qualify this attribute is critical to success in this category.” Christopher Begg

“The compounding machine stocks are the Holy Grail of investment” Mohnish Pabrai

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emotions behavioral finance Compounding Machines

Compounding Machines

(CC) Investment Masters Class - With permission from copyright holder

“To his son, [Shelby] Davis passed along his infectious passion for owning shares in carefully chosen companies (he called them “compounding machines’), his conviction that owning the best compounding machines would lead to unimagined rewards, his distrust of unnecessary spending (why waste money they could be invested?), and his workaholic tendencies” The Davis Dynasty

“What we learned is that if you buy a good and sustainable business, then over time the return of that business will do the natural compounding for you” William Browne

“We expect most or our return to come from compounding of intrinsic value rather than a return to intrinsic value” Ira Rothberg

“Discounts to asset value are not enough, in the long run you need earnings to be able to sustain and nurture the corporate values” Peter Cundill

"The three areas of analysis – business, management, and reinvestment – are the key components of what we call our “three-legged stool.” When we find a business that satisfies all three of our requirements, we refer to it as a “compounding machine,” and we seek to purchase shares at a modest valuation." Chuck Akre

“Compounders are generally market leaders, with high barriers to entry and high returns on capital, whose intrinsic values are growing at a healthy rate. The reason they can be mispriced is typically a function of time horizon. When investor’s don’t focus on the distant compounding merit of a great business, they may not assign that merit a fair value” Christopher Begg

“Our strategy is to own high quality, modestly valued business over many years, to take advantage of the power of compounding as earnings grow. To do that successfully only works if we avoid mistakes – unforced errors – that interrupt the power of compounding” Ira Rothberg

“If you’re going to own a company for a long time, the earnings it generates today will be a small component of the eventual return. Much more important will be how those earnings can be reinvested over time to build value. When companies with positive compounding characteristics become available at really attractive prices, we’ll hope to take advantage” Chris Davis

“A penny doubled every day for a month turns into $10.7m, that’s the effect of compounding. When we are looking for businesses that can do this we are looking for businesses that can reinvest their free cash flow back in the business to continue to earn above average rates of return on that capital and therefore compound the owners capital” Chuck Akre [on compounding machines]

The post Compounding Machines appeared first on ValueWalk.

Focus On The Cash by Investment Master Class

“Remember cash is a fact, profit is an opinion” Al Rappaport

“Cash flow, not reported earnings, is what determines long-term value” William Thorndike

“Great fundamental investors focus on understanding the magnitude and sustainability of free cash flow” Michael Mauboussin

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Cash

“If you don‘t have the free cash flow, you don‘t have anything.” Leon Cooperman

“When I think of ownership of a business we are basically counting cash as it is earned, which is typically when the product or service is delivered. Investing is simply the counting of all that cash and discounting that cash stream at an acceptable rate to determine what the investment is worth and buying that stream as a discount to what it is worth” Christopher Begg

“We want to basically count the cash. For example many people want to look at free cash flow. They will not deduct capital expenses from it. So this goes back to the Patel, Dhandho mentality which at the end of the day is “what’s in the register?” So what I always ask myself is what’s in the register the end of the year after everything’s done. You’ve paid the taxes and you have the capital expenditures. What’s in the register at the end of the next year and the year after? In general that is a metric that I use - what’s in the register? Because different businesses are different, you might have to get to that register number in different ways. I’m focused on the idea that you have some black box that generates some cash. What is that cash and what is the consistency of that cash over time? Then we can put a multiple on it and take it from there. So that’s generally how I go about it.” Mohnish Pabrai

“We quantify scenarios above and below our base case, but the base-case valuation typically looks two years out at our estimate of free cash flow, then applies a forward multiple we believe is reasonable” Adam Weiss

"Our valuation methods are heavily focused on free cash flow (which we define as cash that can be returned to investors or reinvested in the business)" Zeke Ashton

“There is a class of business where the eventual “cash back” part of the equation tends to be an illusion. There are businesses like that – where you constantly keep pouring it in and in, but where no cash ever comes back… struggling with a business that never produces any cash – whether its winning or losing as a matter of accounting – is no fun”. You should seek businesses that just drown in money if they just pause for breadth” Charlie Munger

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“I think the job of a security analyst is to take the reported GAAP earnings of a business and translate them into what Buffett calls owner earnings. I call them economic earnings. The next step is to assess and understand the durability of those earnings. Fundamentally, what you’re looking for is how much cash the business can generate on a recurring basis over a very long period of time” Bill Ackman

“The nature of the business and its ability to generate reasonable amounts of free cash flow – even in stressful environments – in relationship to price paid is the most important factor” Bruce Berkowitz

"The future value of all the future cash flows of the company is ultimately the only thing we care about" Andrew Brenton

"I want to see if a company is generating cash or simply accounting earnings" Ralph Wanger

“We’re essentially trying to pay a low-teens multiple of what Warren Buffett defined in his 1986 Berkshire Hathaway shareholder letter as owner earnings –free cash flow before growth related capital spending – for businesses we believe can compound our capital at a mid-teens rate or better” Ira Rotherberg

“Not every idea fits this, but we basically estimate free cash flow – EBITDA less maintenance capital spending, cash taxes and cash interest, over whatever time horizon we can reasonably assess, putting a reasonable multiple on that in the out year. We’re shooting for situations with double-digit free-cash-flow yields. We think with those we have a very significant margin of safety” Jason Stankowski

"Investments throw off cash flow for the benefit of owners, speculations do not. The return to the owners of speculations depends exclusively on the vagaries of the resale market” Seth Klarman

“The most important metric we look at is probably Enterprise Value to free cash flow” Eric Rosenfeld

"I focus on the free cash flow, and assess its durability and likely future growth" Allan Mecham

“We value companies based on normalised free cash flow, where we strip out the quirks of GAAP to arrive at the excess cash a business generates – or could generate – after reinvesting enough to maintain current capacity and competitive advantages but before investing for growth” Danton Goei

“Good companies will generate free cash that is around the same level as net income, give or take. When that isn’t the case, it’s a flashing red signal to us to look more closely at the quality of the earnings” Kevin Holt

"We like free cash flow [the amount of money available to a company after operating costs and capital expenditures]. At the end of the day, you want to see that cash has been generated that can be spent on dividends, buybacks, mergers, or reinvestment in the business." Larry Pitkowski

"Common yardsticks such as dividend yield, the ratio of price to earnings or to book value, and even growth rates have nothing to do with valuation except to the extent they provide clues to the amount and timing of cash flows into and from the business" Warren Buffett

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“We want to know how much cash is coming back to investors, how predictable that cash flow is going to be and how would I value that relative to the risk-free rate of return. So we’re trying to look at a business as you would look at a bond or as a private equity investor might look at a private entity.” Chris Mittleman

"We approach valuation from a perspective similar to that of a 100% owner – what are the excess cash flows we will receive in the future and how certain are we about their durability?" Wally Weitz

"My father and grandfather were in the construction business, so after my exposure to that I've never been comfortable looking at anything other than cash flow to try to fundamentally understand a business. Over time I've refined that down to discretionary cash flow, what's left over after what we consider maintenance capital spending and dividends" Micheal Cook

"We want to build a portfolio of undervalued businesses that are good companies that generate cash flow" Dave Samra

"A primary determinant of which stocks become a core holding in the portfolio and receive a higher capital allocation are the predictability and reliability of the company's cash flows" Alex Roepers

"We use many different valuation methodologies, but the most common at Maverick is to compare sustainable free cash flow to enterprise value." Lee Ainslee

"I tend

The post Focus On The Cash appeared first on ValueWalk.

Buying The Bottom? by Investment Master Class

“Your chances of picking the bottom of the market are very slim, but if you’re within five or ten percent, your gains can be extraordinary” Shelby Davis

“Some people boast of selling at the top of the market and buying at the bottom – I don’t believe this can be done except by latter-day Munchausens. I have bought when things seemed low enough and sold when they seemed high enough. In that way I have managed to avoid being swept along to those wild extremes of market fluctuations which prove so disastrous.” Bernard Baruch

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“No man is more entitled to buy at the bottom than Buffet, and yet no man is more aware of the foolishness in trying” Frank Martin

“At major turning points in markets, market prognosticators are generally wrong” Leon Levy

“It’s difficult - and, I later came to conclude, impossible - to determine turning points” Paul Singer

“Since the “bottom” is only declared in retrospect, those who wait for it almost always go away empty-handed” Frank Martin

“Even in more normal markets the typical investor feels uncomfortable when he buys too soon and unhappy when he sells too soon. Yet to be a true practitioner of the buy-low-sell-high rule he must be entirely ready to do both” Benjamin Graham

“The lesson learned here is that we are never able to buy at the low. Almost every stock I’ve ever had in the portfolio has always declined after we buy it, and thankfully most usually don’t go down to this extreme, but I think it is pretty normal to have it go down and I almost expect it now.” Mohnish Pabrai

“You must buy on the way down. There is far more volume on the way down than on the way up, and far less competition among buyers. It is almost always better to be too early than too late, but you must be prepared for price markdowns on what you buy” Seth Klarman

“A savant is one who buys or sells within 20% of the top or bottom. Most who believe they’re smart enough to recognize and take appropriate action to capitalize on a market top or bottom as it is occurring are likely more idiot than savant” Frank Martin

"You never get the high and you never get the low" Walter Schloss

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“In my experience, most people who are lucky enough to sell something before it goes down get so busy patting themselves on the back they forget to buy it back.” Howard Marks

“The important turning points in markets are never identified with precision in advance by ‘experts’ and policymakers. This lack of foresight is not surprising, because markets and the course of the economy are not model-able scientific phenomena but rather are examples of mass human behavior, which are never predictable with anything like precision. But what is surprising is that even the most sophisticated investors, traders and commentators continue to rely on predictions issued by those who have no record of success at such forecasts.” Paul Singer

"While it is always tempting to try to time the market and wait for the bottom to be reached (as if it would be obvious when it arrived), such a strategy has proven over the years to be deeply flawed. Historically, little volume transacts at the bottom or on the way back up and competition from other buyers will be much greater when the market settle down and the economy begins to recover. Moreover, the price recovery from a bottom can be swift. Therefore, an investor should put money to work amidst the throes of a bear market, appreciating things will likely get worse before they get better" Seth Klarman

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"Nobody can know where the bottom (or top) is. That is why we normally ease into positions and out, and in bear markets test the waters rather than doing big splashy “cannonballs” into the pool. The worst part of bear markets is not necessarily the cascade of paper for sale at declining prices; rather, it is that liquidity disappears for both buyers and sellers, making it even more difficult to enter or exit a position at the apparent market price." Paul Singer

The post Buying The Bottom? appeared first on ValueWalk.

The collapse of Horsehead Holdings last year came as a surprise to many, not least the company shareholders who thought they were investing in a very liquid company with the potential to a return equal to multiples of their initial investment.

However, at the beginning of 2016 Horsehead Holdings announced that it had tripped a technical default on its revolving line of credit from Macquarie Bank. This effectively forced the group to file for Chapter 11.

Initially, the bankruptcy was blamed on falling commodity prices and some mistakes by Horsehead Holdings itself. As I wrote at the time:

“Back in 2011 Horsehead decided to transition zinc production from its 80-year old smelter to using a different chemical process to produce zinc. The new plant was expected to cost about $350 million and increase EBITDA by as much as $110 million making the company one of the lowest cost zinc producers on the planet. Unfortunately, the company completely failed to manage this project effectively. Costs spiraled to $500 million and after 18 months of operation, the plant could only manage 25% capacity. The final death blow for the company came when it announced that the new smelter needed another $100 million to cover losses while the plant ramped up to full production.”

Horsehead Holdings: The collapse

A commodity company that overstretches itself and struggles to cope when the cycle turns is nothing new. But many believed Horsehead was insulated against such an event thanks to its relatively strong balance sheet and support from shareholders. Some of the world’s most respected value investors including Mohnish Pabrai and Guy Spier had invested in the company and met with management increasing the allure of the shares. Pabrai and Spier were willing to finance Horsehead through this difficult time. In a letter to investors of the Aquamarine Fund dated December 12 and reviewed by ValueWalk, Spier writes:

“I was also confident that the company could raise more equity. Indeed, the company had approached me, and I had responded that although I did not have all the requisite capital myself, I was ready to invest more – provided it was alongside other investors – as part of a sum that ensured that the company could get through this period of tight liquidity.”

“Given these insights, I believed the company’s public statements that it had sufficient liquidity to get through its operational difficulties and the low zinc price.”

Rather than engage with shareholders and creditors to achieve the best results for all stakeholders, Horsehead’s management instead went to ground, shutting down all communications with shareholders.

More ValueWalk coverage on the Horsehead debacle:

Then things really got out of control. Horsehead filed for Chapter 11 protection in February 2016, listing $421 million in secured and unsecured debt obligations more than the value of its assets although according to Gretchen Morgenson of The New York Times, at the beginning of 2016 Horsehead was valuing its assets at around $1 billion. Six months after this valuation the company was estimating the value of its assets to be around $300 million — even for a commodity company this drop in value a staggering. As explained in the article and the company published in the New York Times at the end of August 2016:

“Horsehead’s valuation history certainly seems odd. Its audited financial statements for the September 2015 quarter show assets worth $1 billion. An unaudited report from early February valued the assets at roughly the same. A KPMG report commissioned by Horsehead shareholders values the company at over $1.1 billion.”
“But in a July filing with the court, Horsehead’s financial adviser said the company’s assets were worth an estimated $280 million to $375 million. The main reason for the decline? The company’s decision to write down to almost zero the new zinc plant in Mooresboro it built for $550 million.”

Rather than give up and walk away, Spier decided to fight the company and its creditors for more information and disclosure on what was happening:

“My first port of call was the US Trustee and my petition requesting an equity committee – filed along with a valuation report by KPMG – which put the value of Horsehead in excess of $1.2 billion. This was denied. My next step was to go pro-se (without legal representation) in front of the Judge to request an equity committee. In my pro-se motion, I pointed out the many irregularities and unusual circumstances that had taken place in this case. My motion was joined by more than 250 individual shareholders who also wrote into the court, as well as by Phil Town who wrote his own pro-se motion.

At the hearing on the equity committee, and against all odds, the judge awarded us an equity committee, stating amongst other things that “something did not smell right to the court”.”

The equity committee went on to discover that in the months prior to the bankruptcy the company had indeed received substantial and valuable cash offers from potential buyers of subsidiaries of Horsehead that were more than the value of the outstanding debt.

“This only confirmed what many experts already knew: Horsehead had become the subject to a very well-planned loan-to-own raid by a group of distressed debt funds – lead by Greywolf. Their goal was to transfer ownership in Horsehead into the hands of the debt-holders at the lowest possible cost, and without regard to the rights of the equity holders.”

As well as the coordinated action by distressed debt funds, the existence of offers before the bankruptcy raised the question of why Horsehead’s lenders acted the way they did towards the company. Surely no lender would cut off a business knowing a buyer was waiting in the wings offering a substantial premium?

Spier concludes that the only reasonable explanation for the actions of Horsehead Holdings’s key lender, Macquarie is that the bank’s real client was not Horsehead, but the funds looking to drive the company into bankruptcy.

The equity committee’s only option left was to find a buyer for the business or alternative plan of reorganization. In trying to do this, the committee once more ran into problems. There were only 2 ½ months to find an alternative plan while the company and its advisers were clearly in full cooperation with creditors:

“That gave us 2 ½ months to try to find an alternate deal for the company. In spite of receiving substantial interest in the assets, we were greatly hindered by the orientation of the company and its advisors who were in full co-operation with the creditors.

For example, we offered to put up new money and to co-invest alongside the creditors which was rebuffed without a counter-offer. Also, significant was that we had little to no co-operation from the company’s investment bankers, Lazard who did their very best to slow down any interested party, and to dissuade them from going through with their due-diligence. And there

The post Horsehead Holdings: A Failure Of Capital Markets? appeared first on ValueWalk.

Mohnish Pabrai is well known in value circles around the world. His impressive investment performance over the years is testament to his rigorous process and commitment to value few hedge fund managers still follow.

Between inception (June 2000) and June 2015, a $100,000 investment in Mohnish Pabrai’s leading fund would have turned into just under $800,000, an annualized return of 16%. Unfortunately, Mohnish Pabrai’s returns have suffered over the past year and a half thanks to one investment that blew up, costing the fund more than 30%. At year-end 2016 the leading Pabrai Investment was up 5.3% after a loss of 30% during the first half and a gain of 27.9% during the second half.

Also see 2016 Hedge Fund Letters

In a lesson of how detrimental one significant loss can be to long-term returns, after the first half’s poor performance the fund’s annualised return since inception has dropped to 12.4%, although this still means the fund has easily outperformed the S&P 500 which has achieved an annualised return of 4.8% over the same period.

Mohnish Pabrai Up 5.3% In 2016: A Year He’d Rather Forget

Mohnish Pabrai’s losses can be attributed to one main investment mistake, which began to unfold during 2015 and then completely blew up during the first half of 2016. The company in question is Horsehead Holdings, a company I have written about several times before. For more information on how Horsehead rose to fame and then spectacularly collapsed, check out the links below for other ValueWalk coverage published over the past year.

The Horsehead scenario and subsequent losses inflicted on the Pabrai funds led to investors putting a total of $100.4 million from the various Pabrai funds during the year pulling assets under management down to $438 million (about a 20% AUM drop in just one year), down from a high of just under $700 million at the end of 2014 or about 36 percent since the peak. It seems 2016 really was a dismal year for Mohnish Pabrai, but ever the optimist he remains excited about the prospects for the funds and their holdings. Specifically, in his year-end letter to investors, Mohnish Pabrai writes:

“The recent redemptions were used by me to convert these redemption lemons into lemonade. I used the outflows to trim or exit our lowest conviction ideas. I love what we elected to keep. The gap between market value and intrinsic value continues to be large for all three funds, and this bodes well for all of us.”

Some of the positions held back and increased are already producing handsome returns. According to the letter, during the first 10 calendar days of 2017 the leading Pabrai fund gained 10.5%:

“It is par for the course for equity markets to go through long periods of low returns coupled with short periods of spectacular changes in value. Predicting these near-term movements in the markets is a fool’s errand. Our concentrated portfolio can magnify these effects…I had mentioned last year that our portfolio was like a coiled spring – deeply undervalued. The spring is beginning to uncoil.”

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The post Mohnish Pabrai Up 5.3% In 2016: A Year He’d Rather Forget As AUM Drops Around 20% appeared first on ValueWalk.

In this episode, Preston and Stig talk to one of the most respected investors implementing the Buffett-Graham approach. Mohnish Pabrai has been running his Pabrai Funds since 2000 and since that time his fund has produced triple digit returns.

Mohnish has become quite famous in the investment world because he attributes his success to being a cloner of Warren Buffett and Charlie Munger. In an effort to achieve similar results to Berkshire Hathaway, Mohnish has dedicated his professional life to understanding the more obscure elements to their success. He has modeled his Pabrai Funds after the same company structure that Buffett used when he ran Buffett Partnership Ltd.

In this episode, you’ll learn:

How Mohnish accumulated business knowledge from the age of 11
Why Mohnish is one of the very best and respected investors in the value investing community
What special advantages people like Bill Gates and Warren Buffett had to become so successful
How Mohnish set up and ran a business like Warren Buffett and Charlie Munger
Why investing is not a team sport

Tweet your comments about this episode directly to Preston, Stig, and the rest of The Investor’s Podcast Community using #TIPMoney.

Get The Investor’s Podcast blog posts and podcast episode updates on your Facebook feed by liking We Study Billionaires.

Books and Resources Mentioned in this Podcast

Mohnish’s new website: Chai with Pabrai

Mohnish’s Book, The Dhandho Investor – Read Reviews for this book

Mohnish’s Youtube Channel

Mohnish’s Twitter

Videos That Support This Podcast

Article by The Investors Podcast

The post The Dhandho Investor With Mohnish Pabrai [Podcast] appeared first on ValueWalk.

One of our favorite investors at The Acquirer’s Multiple is Mohnish Pabrai.

Mohnish Pabrai is the Founder and Managing Partner of the Pabrai Investments Funds, the founder and CEO of Dhandho Funds, and the author of The Dhandho Investor and Mosaic – Perspectives on Investing.

He’s one of the smartest guys on the planet when it comes to investing.

One of my favorite Pabrai interviews was one he did with The Graham & Doddsville Newsletter, it’s a must read for all investors.

Here’s an excerpt from The Graham & Doddsville interview:

Question: How did you get started with value investing?

Until I was 30 years old, frankly, I had never heard of Mr. Buffett. I had never heard of value investing. This was 1994 and I was vacationing in London with my wife. I was looking for something to read on the flight back to Chicago, and I picked up one of Peter Lynch’s books. I am an engineer by training, so this was a different field for me. I read that book on the flight and I loved it.

It made all the sense in the world to me, in terms of how to and how not to invest. I thought this was an interesting area and I wanted to know more about it, so I found that Peter Lynch had another book and I read that one too. I wanted to learn even more, but I ran out of Peter Lynch books to read. I remembered that in one of the books, Peter Lynch mentioned Warren Buffett and told a story of how Buffett had called him to get his permission to use a quote.

This was the first time I had ever heard of Warren Buffett. I figured since Lynch was talking to Buffett, I should learn more about who Buffett is. I looked around, and found the first two biographies that had just been published: Lowenstein’s The Making of an American Capitalist and Hagstrom’s The Warren Buffett Way. I read those books and I just had an epiphany. They resonated strongly with me.

The thing that I found very strange was that if there is such a thing as the laws of investing, Warren Buffett has pretty much laid them out. What I couldn’t understand was that when I looked at the entire mutual fund industry at the time, which were the professional managers that I had exposure to, I saw that these guys not only did not follow the fundamental laws of investing, but most of them didn’t even know what they were.

At the same time, their results reflected sub-par performance. So I thought there must be a correlation between these guys not following the rules and having poor performance. The second thing I found very strange was how you can have an entire industry which does not function with a solid framework. To me, it is like people doing brain surgery by just ‘winging it’.

That is how I saw mutual funds work – they were just winging it, or they come up with any nuance or ‘flavor of the day’ they want to pursue. I had a thought that if novices like me simply adopted Buffett’s approach and invested in the equity markets with a concentrated portfolio, etc. that I was likely to do better than most of the industry professionals. So I said it was worth testing this hypothesis out. I was lucky at the time in 1994; I had about $1 million in cash. I had just sold some assets of my business and I decided to go ahead and manage that in a Buffettstyle concentrated portfolio, buying things I understood, etc. That is how I got into value investing.

Question: You have managed Pabrai Funds since 1999. That must have been quite a time to open a value fund.

Actually, 1999 was very interesting. I think it was a great time to start as a value investor because the market in 1999 and 2000 had segregated. As a matter of fact, on the day that the NASDAQ hit its peak, Berkshire hit its 52-week low. What happened is that a lot of money had gone into these frothy dot-com type stocks, but effectively it had come out of brick-and-mortar, normal businesses. A lot of brick-and mortar, real-world businesses were trading really cheap. So it was actually a great time to go into the equity markets as long as you didn’t drink the same Kool Aid that everyone else was drinking. In fact, after Pabrai Funds’ first year, in June 2000, we were up approximately 38% after fees. Then the second year we were up by mid- 30% after fees. We did really well in the year when everything crashed and burned, for that reason.

Question: Over the past 10 years, how have you seen the value investing landscape change?

There isn’t much of a change. The good news is that there is now more of a community with things like Whitney’s newsletter (Value Investor Insight), conferences, and the Columbia Value Investing Program. Clearly there is now more interest. However, if you look at all of the people involved with investing in the equity markets worldwide, the percentage of them that focus on true value investing is still a very, very miniscule percentage. I think that, in general, the opportunity to do value investing is almost as good as it was 10, 20 or even 30 years ago.

Question: Where do you hunt for your ideas?

When I look for ideas, I look in places like the 52-week-low list, Value Line, as well as stocks with low P/E ratios, low P/B ratios, or large discount-to-book value. Now I have Joel Greenblatt’s Magic Formula; I look at that on a daily basis as well. I also subscribe to Portfolio Reports, published by Outstanding Investor Digest, which gives a listing of all the buying of major value investors every few weeks. I also look at 13F filings of the usual suspects such as the Fairholme Fund, Marty Whitman, Einhorn, and all of those folks. That is basically where I go fishing.

Question: What are characteristics of the companies that attract you?

In general, I look for industries with a slow rate of change, companies with some type of moat, and companies with hard assets. I look to buy businesses where I can rest my hat on the hard assets of the business. Other

The post Mohnish Pabrai – Value Is Its Own Catalyst – The Market Is a Weighing Machine appeared first on ValueWalk.

One of our favorite investors at The Acquirer’s Multiple is Guy Spier.

Spier is the founder and managing partner of Aquamarine Capital, an investment partnership styled after the original 1950’s Buffett partnerships. In 2008 he, along with Mohnish Pabrai, had lunch with Warren Buffett after submitting the winning bid for Buffett’s annual Glide charity auction. He completed his undergraduate studies at Oxford and earned an M.B.A. from Harvard Business School.

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One of my favorite Spier interviews was one he did with The Graham & Doddsville Newsletter. Here’s an excerpt from that interview.

Warren Buffett Berkshire Hathaway — Photo by thetaxhaven

Guy Spiers thoughts on value investing…

‘Oh my God. This is so exciting. There are market inefficiencies that I can exploit. If I just get a few things aligned right I could make billions and live this incredible life.’ And many people who do value investing end up living these incredible lives. And we live long lives is what we’ve figured out. We know from Warren Buffett that it’s not got to do with intelligence – he says some people get it, some people don’t.

I got it, but my God, have I strayed from the path in so many different ways. I had such a narrow understanding of the wisdom that Warren Buffett had to impart. If my investment career is the only thing we’re talking about, I definitely lost at least five years, perhaps more, getting started on it because my head was filled with all these ideas of efficient markets. But I’ve lost more time by not fully learning the lessons that are available there for all to see.

The basic tenets of The Intelligent Investor – Mr. Market, things having intrinsic value, stocks representing part interest in businesses – are fantastic. But I was in a position ten years ago not to charge a management fee the way Warren Buffett did, but I was charging a management fee. Why on earth was I doing that? I don’t know how many years ago I met Mohnish [Pabrai]. He was not charging a management fee. I was an example of the guy sitting on the other side of the road at the gas station. You know the Tom Peters story? Mohnish talks about cloning and seeing whether people are willing to clone or not. I’m sitting there, laughing at all those idiots who don’t clone. At some point I realized, ‘Wait. I’m the guy on the other side of the road who is not cloning what is obviously working.’ There are so many things that I lost time with and didn’t learn because I had too narrow an understanding of the wisdom that was to be imparted.

G&D: Mohnish Pabrai and the practice of cloning?

GS: What’s so beautiful about cloning is that it’s not mutually exclusive. The more you do it, it’s helpful for the whole community and enough of humanity will never do it. I’m at the Berkshire meeting with Mohnish and all of these people are coming up to him. He has spent the last twenty years making people feel glad that Mohnish Pabrai’s on the planet. In small ways and in big ways, just doing it as a habit. So if you’ve been handling people right for 20 years, you become a very real asset to whatever business you’re a part of because you’re just going to get lucky more often. I’ve experienced that over the last five years. I’ve gotten luckier with people more and more often and it’s just a lovely thing. I had to realize I was not put on earth to help Guy Spier. I was put on earth to help humanity.

I’ll give you an example. Bill Ackman got into doing this a year or two before me. I knew him; he was a year above me in business school. They had offices in 245 Park Avenue and he just said, ‘Come here, use Bloomberg, spend as much time as you like. Really happy to have you here.’ I remember that and I would leap at the opportunity to help him out in some way if he asked me to.

G&D: Mohnish got that idea from Robert Cialdini, right?

GS: There’s a huge amount of wisdom there. I told somebody 10 years ago, ‘I’m writing 20 thank you notes a week.’ And they say, ‘How ridiculous. Who are you writing thank you notes to?’ I say, ‘The doorman, anybody I can put my hands on really, the person who served me at the shop. You name it, left, right and center.’ They’re like, ‘How’s that working for you? Have you seen any changes?’ Not really. They say, ‘What a dumb idea.’ I say, ‘Well, the doorman was really nice to me this morning.’

So say I’m writing thank you notes like that and I attend the Pabrai Fund Annual Meeting and I write him a thank you note, one of twenty I wrote that week, but that may have been the only thank you note Mohnish received from the meeting he held in Chicago. And when he was in New York for some reason he had the idea to call or to e-mail me and to say, ‘Would you like to get dinner?’ These simple changes in behavior make such a massive difference because at the time my derisive friend is asking me how my relationship with the doorman is going, the thank you note to Mohnish Pabrai hadn’t been written.

I’ll tell you something else. It’s made me more successful that the average member of Joe Q. Public and the average person in my set of friends is incapable of giving it the attribution it deserves. They’ll say, ‘You’re lucky. You’re smart. You’re in the right place at the right time.’ And I’m like, ‘No, no, no. It’s because I was doing Cialdini for the last five years. You can do it too.’ You know, in some way that is even more surprising to me than value investing because value investing is a very narrow thing. All we’re talking about now is a strategy for anyone to improve their lives. Finally, after ten years of being married and five years of doing this, my wife gets it.

As you can see, in a certain way I’m more enthusiastic about this than value investing. Having read Ben Graham would not have helped me if I was a poor boy in Bangladesh, but this Cialdini reciprocity stuff is much more basic and would have helped anyone. Warren has this famous saying about how he was very lucky as to where he was born. If he was born in Bangladesh those good business practices wouldn’t have made a big difference.

It’s like Wal-Mart. Sam WaltonGuy Spier on Mohnish Pabrai and ‘That’ Meeting With Warren Buffett appeared first on ValueWalk.