Mohnish Pabrai

A few months ago I had the pleasure of attending the 2016 Pabrai Funds and Dhando Holdings annual meeting in Chicago.

It turns out, this was the last Chicago meeting that Mohnish Pabrai will be holding for his funds going forward.

Mohnish Pabrai and the Horsehead Holdings catastrophe

For those unfamiliar with Mohnish Pabrai, he is the founder and CEO of Pabrai Funds, and currently manages roughly $400mm in capital for individuals and institutions. Mohnish Pabrai adheres to a value investment philosophy, wherein he has cloned Warren Buffett’s techniques and has applied them ever since he began investing 1994. Since then, Pabrai has had phenomenal returns over the years. Recently, however, his funds have under-performed over the last five-year stretch, which in Mohnish’s words, is an anomaly. Mohnish is very bullish on the future of his funds, which we’ll get to later.

The evening consisted of a meet and greet, a presentation by Mohnish, Q&A session, followed by a cocktail hour and a dinner. There was a lot to gain from Mohnish Pabrai’s insights and views on his investments.

Like Warren Buffett, Mohnish Pabrai doesn’t typically discuss individual stocks within his portfolio at his meetings, but due to his recent five-year under-performance, and significant portions of his portfolio being concentrated on a few investments, he decided to give further explanations into his reasoning behind his two largest investments: FCA Auto – Fiat Chrysler Automobiles (NYSE: FCAU) and his investments in General Motors warrants.

Mohnish Pabrai’s presentation focused on fund performance and fund outlook, peppered with FCA (Fiat Chrysler) commercials and topped with his views on the future of Pabrai Fund’s investments. As mentioned, the portfolio is currently valued at ~$400 million, although Mohnish believes the intrinsic value is $1 billion+ which will hopefully be reflected within the next 2-3 years (note: current value of FCA Auto and GM warrants within the portfolio are roughly half of the portfolio, or $200 million). This represents 150%+ premium over the current value of its holdings

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Pabrai Funds Springs Back After Horsehead

FCA Auto (Fiat Chrysler)

Pabrai Fund’s largest position is in FCA Auto (Fiat Chrysler), representing ~28% of the portfolio. The investment has grown to be an outsized position within the portfolio, which he believes to continue to be significantly undervalued.

The auto business is known to be brutally competitive, where customers have a lot of choices. American auto-makers are unionized and the industry requires high capital expenditures. This isn’t the most conducive environment for a prosperous business. Mohnish Pabrai agrees with all of this points, in fact he even mentioned he “hates the car business”, however, he believes there is still opportunity in the space.

In 2012, Mohnish noticed a few investors who invested in the auto industry. David Einhorn, founder of Greenlight Capital management and (most likely) Ted Weschler, one of Berkshire Hathaway’s head investment managers, invested in General Motors. Knowing them as very thoughtful investors, he decided to drill down into GM and the auto industry, and while doing so, he came upon FCA Auto (Fiat Chrysler).

FCA Auto quickly caught his attention, and he mentioned it was one of the most exciting times in his investment career, during which he ended up reading about the Company and the industry for months and often stayed up until the wee hours of the night doing so. The below was discussed during the presentation, but mostly mirrors and quotes his Q2 2016 investor letter where he was able to fully explain his thesis. Mohnish Pabrai believes the following (Mohnish’s words are highlighted):

1. Sergio Marchionne (CEO of FCA Auto) is a genius

Mohnish Pabrai admits that he probably would have passed on the Company if it weren’t for Serio Marchionne running the business:

“If one had invested ~$1 million in Alusuisse when he became CEO in 1996 and then kept moving those funds as Sergio moved, that $1 million would be worth north of $30 million today. And that includes twelve of those twenty years spent in the lousy car business – with zero prior experience in the auto industry. By 2019, when he intends to hang up his boots and study Theoretical Phyusics (yes, that’s right!), that $1 million will likely have grown to over $100 million.”

“When Marchionne came to Fiat in 2004, it was on life support and almost bankrupt. It had cycled through three chairmen, five CEOs and three heads of Fiat Auto in the previous four years. He nursed it back to health and solid profits so that, in 2009, when the much larger Chrysler was nearly liquidated by the US government and the lights were about to be shut off in Detroit, he was there to pick up the pieces. And he negotiated the purchase with no cash going from Fiat to Chrysler’s owners. If there is a better negotiator than Sergio on the planet, I am not aware of it.”

2. Fiat Chrysler has superior products and a strong brand

When Sergio took over in 2009, there were only 250,000 Jeeps sold in the world, with the majority of them being sold in North America. In 2016, Jeep sales will reach 1.5 million, and is on pace to reach 2 million jeeps in 2018. The Jeep brand is something to be reckoned with, and is a Fiat powerhouse.

“With its World War II legacy and seventy-five-year history, Jeep is an iconic global brand. In China the term people use for SUVs is Jeep. Like Xerox, Fedex, or Kleenex. Products like the Wrangler have virtually zero competition – folks who aspire to own a Wrangler see almost any other SUV inferior. FCA does not break it out, but I am sure FCA nets over $4,000 on average per Wrangler. And, on average, every Jeep nets them north of $2,500. The Chinese joint venture Jeeps are likely half of that. Let’s say those are $1,000/Jeep. In 2018, the Jeep business alone will likely generate pre-tax earnings of over $4 billion.”

“…RAM has wrestled market share from Ford and GM. Since 2009, RAM’s US market share has doubled from 11% to 22%. Their Canadian performance is even better – going from 14% to 30%!

RAM’s global volume is slated to be 620,000 units in 2018. They print money on these with average profits of over $5,000 per truck or commercial van. In addition, outside NAFTA, the Fiat commercial lineup does another 600,000 units a year.

The North American light truck market delivers margins that are similar to those of European luxury imports and this oligopolistic business deserves to be valued along the lines of BMW, Audi, etc.”

3. Fiat owns three auto parts companies that are extremely valuable

Fiat’s auto parts companies – Magenti Marelli, Comau, and Teksid – generate over $10 billion in sales. In the past, the parts businesses have had a measly 3% operating margin. Despite these low margins, Fiat has already received offers north of $2.5 billion for these businesses. These margins are slowly inching upward, quarter after quarter. Sergio’s ultimate goal may be to gain more robust margins and subsequently sell the businesses.

“There have been rumors that FCA has received offers for these businesses from private equity firms for $2.7 billion. FCA is said to

The post Why Famous Value Investor Mohnish Pabrai Is Bullish On FCA Auto & The Overall Car Industry appeared first on ValueWalk.

Mohnish Pabrai, Managing Partner, Pabrai Funds and Guy Spier, Author, The Education of a Value Investor talk about global markets, the rally and aviation sector, in a chat with ET Now.

Good To Keep Low-Cost Carriers Like Indigo On Radar: Mohnish Pabrai

The post Good To Keep Low-Cost Carriers Like Indigo On Radar: Mohnish Pabrai appeared first on ValueWalk.

Benzinga CEO Jason Raznick and PreMarket Prep producer Spencer Israel caught up with Mohnish Pabrai, the legendary hedge fund manager and investor. Pabrai is the Managing Partner of Pabrai Funds, CEO of Dhandho Funds, and author of The Dhandho Investor?. In this interview Pabrai discusses how he came to invest in auto stocks despite hating the industry for a long time, the future of automated vehicles, and what he’s learned from studying Warren Buffett.

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Mohnish Pabrai Up 5.3% In 2016: A Year He'd Rather ..

A Conversation With Legendary Investor Mohnish Pabrai

By Stitcher

The post A Conversation With Legendary Investor Mohnish Pabrai appeared first on ValueWalk.

I very much enjoyed doing this podcast with Preston Pysh and Stig Brodersen. Both are great guys who do a great service to the Value Investing Community. Thanks guys!

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

In this second part interview, Preston and Stig discuss some of the finer details of my investing approach. Recently, the airline industry has had enormous amounts of market consolidation and a few stocks seem to have favorable valuations. We had discussions on these potential opportunities and what are the long term prospects of these opportunities.

In this episode, we talked about:

My recent investment in Southwest Airlines.
My biggest investment mistake, and how I made more than $100 million because of it.
If Warren Buffett and Charlie Munger consider any macro decisions in their investment approach.
Why the airline industry is a terrible sector, but might still be a great investment at the moment.

By Chai With Pabrai

The post Mohnish Pabrai: ?The Investors Podcast – Part 2 appeared first on ValueWalk.

They say good things come to those who wait and for the investors of Mohnish Pabrai’s and his Pabrai funds this is certainly the case.

Pabrai is considered to be one of the best value investors managing cash for investors today, and until 2015, his returns certainly confirmed this fact. Unfortunately, 2015 and 2016 turned out to be two of the most disastrous years in the history of the Pabrai funds.

Over the fiscal year July 1, 2015, to June 31, 2016, PIF2, the leading Pabrai fund, which has been in existence since June 2000, saw the value of its assets drop by 30% erasing several years of gains. Before the drop, PIF2 had turned $100,000 into $800,000 since inception, but after losses, the total gain had fallen to around $500,000.

The dire performance registered in 2015/2016 can be traced to just one holding, the now bankrupt Horsehead Holdings. Horsehead originally seemed to be a promising deep-value turnaround play, but the firm collapsed into bankruptcy at the beginning of 2016. Since the bankruptcy was announced, Horsehead’s investors have accused creditors of foul play as over the space of six months nearly $0.5 billion of assets vanished from the company’s balance sheet.

Pabrai funds Storms Back Into Profit Up 25% In Q1

It appears Pabrai has already put this disaster behind him. Indeed, according to his first-quarter letter to investors of the Pabrai funds, since the beginning of the year, PIF2 and PIF3 are up nearly 25%. Over the last nine months, all three funds are up between 49% and 62% versus a 14% gain in the S&P 500 over the same period. After these gains, a $100,000 investment in PIFI at inception on July 1, 1999, and rolled over into PIF2 on 12/31/02 ($197,900) was worth $1,153,000 as of March 31, 2017 (net to investors). This equates to an annualized return of 14.8% since inception – after all management fees and expenses, according to an April 12th letter to investors reviewed by ValueWalk.

By Fabarsi (Own work) [CC BY-SA 3.0], via Wikimedia Commons

Pabrai writes in the first quarter letter that he believes the portfolio remains deeply undervalued, despite recent gains. The hedge funds’ holdings of non-US, domiciled assets is at an all-time high of around 65%. Included in this total is a holding in Fiat Chrysler even though the company “generates much of its cash flow in the US because it’s official headquarters is in Europe.”

However, it appears that not all US stocks are unattractive to Pabrai. He writes that the one stock he has acquired in the US over the past 12 months is Southwest Airlines.

Pabrai goes on to say he is not avoiding US stocks because they are overvalued, rather it’s because he’s finding better opportunities overseas. Thinly traded names in South Korea and India are attractive and have been acquired for the funds’ portfolio, and Pabrai also likes Indian equities writing, we “have the highest exposure we’ve ever had to companies based in India (over $100 million or over 18% of the pie). I love what we own in India. We will make a lot of hay from our Indian holdings in the year ahead.”

The letter states that Pabrai Funds will “stop accepting inflows at this time”.

The post Mohnish Pabrai Storms Back Into Profit Up 25% In Q1 appeared first on ValueWalk.

Mohnish Pabrai – Background

Pabrai worked with Tellabs between 1986–91, first in its high speed data networking group, and then in 1989, joined its international subsidiary, working in international marketing and sales.

In 1991 he started his IT consulting and systems integration company, TransTech, Inc. with about US$30,000 from his own 401K account and US$70,000 from credit card debt. He sold the company in 2000 to Kurt Salmon Associates for US$20 million. Today he is the managing partner of the Pabrai Investment Funds (a family of hedge funds inspired by Buffett Partnerships), which he founded in 1999. (Source: Wikipedia)

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Mohnish Pabrai

You will also know Pabrai as having split a $650,100 lunch bill with good friend Guy Spier.

You can read Guy’s thoughts of the lunch and what he took away.

The Dhandho Investor: The Low-Risk Value Method to High Returns

In Mohnish Pabrai's Google Talk, see video below, he talks about the investment concepts in his book The Dhandho Investor – a book highly recommended in the Old School Value’s best investment book list.

Most value investors have read it already, but for those that haven’t, the Dhandho concept of doing business centers on risk vs uncertainty, circle of competence and margin of safety.

Here’s an excerpt from Amazon.

A comprehensive value investing framework for the individual investor

In a straightforward and accessible manner, The Dhandho Investor lays out the powerful framework of value investing. Written with the intelligent individual investor in mind, this comprehensive guide distills the Dhandho capital allocation framework of the business savvy Patels from India and presents how they can be applied successfully to the stock market. The Dhandho method expands on the groundbreaking principles of value investing expounded by Benjamin Graham, Warren Buffett, and Charlie Munger. Readers will be introduced to important value investing concepts such as “Heads, I win! Tails, I don’t lose that much!,” “Few Bets, Big Bets, Infrequent Bets,” Abhimanyu’s dilemma, and a detailed treatise on using the Kelly Formula to invest in undervalued stocks. Using a light, entertaining style, Pabrai lays out the Dhandho framework in an easy-to-use format. Any investor who adopts the framework is bound to improve on results and soundly beat the markets and most professionals.

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The Most Important Thing

Here are the sticking points from the video that you should take away.

“The most important thing is that, before you invest, you should be able to explain the thesis without a spreadsheet within four or five sentences. Typically I write down those sentences before I invest, so if I have a conversation with someone you could very quickly explain why this investment makes sense.” -Mohnish Pabrai, Google Talk July 21, 2014

I would add that once you have a firm understanding of the investment case, then you can dive into the numbers with stock analysis tools. Just don’t fall into the trap of making the numbers fit your thesis.

Patience is the Single Most Important Skill

“Good traits, or important traits for being a good investor, number one the single most important skill is patience. So I think the thing is that markets have kind of a way of deceiving us, because you know when you turn on CNBC and you see all those flashing red and green lights and all that, its inducing the brain to think that you need to act now, and you need to act immediately. Nothing could be further from the truth. You know Buffett always talks about having this punch card where in a lifetime you make twenty punches, and each time you buy a stock you punch it once so in a lifetime you’d make twenty investment decisions. Which means that if you started investing at twenty and ended at eighty, every three years on average you’d make one investment. And that is very hard for most people to do. And so, the more you can slow down your investing, and the more patient you can be, so the issue is that the time scales of which companies go through change and such, is very different from the time scales of which the stock market operates. So you really have to focus not so much on the stock market and have a lot more focus on the nature of change in businesses and be willing to be in there for a while.” -Mohnish Pabrai, Google Talk July 21, 2014

Watch Mohnish Pabrai's Talk

Play the video at 2x and you’ll be done in half the time.

Additional Reading

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Article by Hurricane Capital, Old School Value

The post Mohnish Pabrai’s Advice On How To Win Without Losing Much appeared first on ValueWalk.

Mohnish Pabrai is one of the world’s most respected value investors. However, few outside the world of value investing know his name.

Still, the lack of notoriety hardly matters because Pabrai’s returns speak for themselves. His leading Pabrai Investment Fund II, which evolved out of PIF I has produced an annualized return of 13.6% since PIFI was founded on July 1, 1999. A $100,000 investment in PIFI at inception on July 1, 1999, and rolled over into PIF2 on 12/31/02 ($197,900) was worth $936,600 net as of December 31, 2016.

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

The returns have continued to grow with Pabrai writing in the funds’ annual report that during the first four months of 2017, PIF3 added a staggering 28.8%, versus 7.1% for the S&P 500.

As well as the yearly returns for the funds’, Pabrai also gives a fascinating insight into his investment process in his newly released 2016 annual report to investors, a copy of which was reviewed by ValueWalk.

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Mohnish Pabrai Ferrari — Unsplash / Pixabay

Mohnish Pabrai On The Mistake Of Selling Ferrari

Enzo Ferrari once said about his luxury car brand, “the Ferrari is a dream - people dream of owning this special vehicle, and for most people, it will remain a dream apart from for those lucky few." Mohnish Pabrai was able to realize this dream with his holding of Ferrari shares, but unfortunately, he cut his own Ferrari experience short.

Pabrai spends a portion of the Pabrai Investment Funds’ 2016 annual report lamenting the premature sale of his stake in Ferrari received when the luxury carmaker was spun off from its parent Fiat Chrysler in early 2016. PIF-owned around 13.8 million shares of Fiat amounting to $70 million and received one Ferrari share for every Fiat share owned at the time of the spin. PIF was left with 1.4 million shares in Ferrari.

Mohnish Pabrai continues to hold Fiat, and continues to believe that the shares are undervalued even after the stock has more than doubled, but rather than hold onto the Ferrari stake, PFIs divested the majority of this (at the time) unwanted asset.

Today, the shares are worth (including the initial Fiat stake) a total of $269.1 million compared to a purchase price of $69.6 million. A large part of this gain has come from Ferrari, which Pabrai unfortunately missed. But why did he miss this once-in-a-lifetime opportunity?

Part of the Ferrari stake was sold to meet redemption requests, but the rest Mohnish Pabrai writes was sold because “I am a cheapskate.”

“The sin I committed was selling 700,662 shares to buy something else. And therein lies the problem. I am a cheapskate. I try to buy assets on the cheap and sell them when they approach 90% of intrinsic value. But sometimes, this is not a good way to go.”

He goes on to explain that sometimes, it’s better to hold on to a wonderful business at any price, rather than sell a wonderful business in an attempt to profit buying a cheaper one.

“Ferrari is a unique asset. It is one of the widest moat businesses on the planet. The cars appreciate after they are sold. Incremental margins on their higher-end cars likely exceed 70%. More importantly, Ferrari is led by Sergio Marchionne, who is simply one of the best CEOs on the planet. May god give me the wisdom to not sell another share of Fiat Chrysler or Ferrari as long as Sergio runs them. Ferrari is an incredible asset, and when it is managed by one of the top 100 all-time greatest CEOs to come along, it is pure stupidity to sell."

The company that looked so attractive it inspired Pabrai to sell Ferrari is Southwest Airlines. $4 million from the sale of Ferrari was devoted to a Southwest position, while $1.4 million was used to “buy small stakes in four obscure undervalued Korean stocks”.

How have these investments done today? Well at the time the letter the Southwest and Korea positions were worth $8.1 million, which isn’t bad but is $2.4 million less than the $10.5 million the Ferrari were worth. Cheapness is no match for a strong business moat:

“Why did I do it? Well, Southwest Airlines was very cheap (it was trading at less than 7 times cash flow) while Ferrari sported a robust double digit multiple. From a strictly moat perspective, there is no question that Ferrari’s moat is vastly superior to Southwest. I love Southwest, but it ain’t no Ferrari. And on top of that, Ferrari has a super-human CEO in Sergio. I should simply have either passed on Southwest (very hard to do that!) or looked for other stocks to sell. While the Southwest narrower moat plus lower P/E may have made me feel it was better than the wider moat, however, more expensive Ferrari, there is no justification for me to sell Ferrari to buy the Korean or Indian stocks. I have a good understanding of the Korean and Indian businesses. They are cheap. However, they cannot hold a candle to Ferrari from a moat perspective.”

And even though shares in Ferrari have doubled since being spun off, Pabrai sees further upside:

“The reason I wanted to include my adventures with Ferrari in this letter was to try to reinforce in my brain the importance of just sitting on your ass when you own great businesses run by great managers. It is not a good idea to sell them unless they are egregiously overvalued. I may have felt Ferrari was fully priced at $44, but by no means was it egregiously overpriced. And today, at $84, I can see actions that Sergio can take that may make $84 look cheap in a few years.”

[Pabrai did not see out of Ferrari entirely and funds in the group still own shares valued at $33.5 million of the auto maker.]

The post Mohnish Pabrai On The Mistake Of Selling Ferrari appeared first on ValueWalk.

Mohnish Pabrai On Sears Bankruptcy And Rolls-Royce

Mohnish Pabrai’s full-year 2016 letter to investors in the Pabrai funds is full of interesting insights.

The most fascinating insights, however, have to be Pabrai’s detailed descriptions of his investment mistakes during 2016. There weren’t many significant mistakes or indeed mistakes at all, but the discussion on those companies that did not live up to expectations is informative.

2016 Hedge Fund Letters

One such stock is Rolls-Royce.

[timelless]

Rolls-Royce Sears Mohnish Pabrai — 3dman_eu / Pixabay

Mohnish Pabrai On Sears Bankruptcy And Rolls-Royce

Pabrai first invested in Rolls-Royce in 2015 buying at the end of the year for $11.45 share. He writes that he was initially attracted to the business due to its oligopolistic (and sometimes monopolistic) leadership position in widebody jet engines. The addition of new CEO Warren East, who came to the company from world leading chip designer ARM Holdings finally tipped the balance and convinced the renowned value investor to initiate a position initially worth $23 million.

It is no secret that Rolls-Royce has suffered plenty of problems over the past few years. An investigation into allegations of bribery by the UK’s serious fraud office resulted in a multi-million pound fine earlier this year. What’s more, the company has suffered from poor trading in its marine division and a transition between engines and accounting standards has significantly impacted both the top and bottom lines.

Still, there is value to be found in the business specifically, the company’s long-term service contracts, as Pabrai explains:

“When a new aircraft is sold, it is usually competitive to get to be the supplier of the jet engines. As a result, jet engines usually get sold at either break-even or a loss. However, where these engine suppliers make their money is in the maintenance contracts and parts. A jet engine will usually last for about two decades or more. Over that term, most airlines prefer to have the engines maintained by the manufacturer. Even if they opt for (a cheaper) third party, it is almost unheard of in aviation to use parts from anyone but the original manufacturer. And Rolls prices those parts such that it is irrelevant whether it is the one maintaining the engines. This is a classic razor-razorblade business.”

There are really only three main operators in the jet engine business, Rolls-Royce, GE and Pratt & Whitney. Rolls-Royce has a monopoly position on the Airbus A350 wide-body jet, which is a competitor to the Boeing 787 Dreamliner. The A350 is likely to be a highly successful aircraft with a current order book of well over 800 planes. Considering of this order backlog, coupled with the long-term service contracts, Rolls-Royce could be booking revenues for the 787 and A350 for the next five or six decades.

The problem with Rolls-Royce is that the company has always been a chronic underperformer with lumbering bureaucracy pushing the margins below those of GE. The company is also been dogged by poor capital allocation decisions. Mohnish Pabrai believed that Warren East was the solution to the company’s problems. His record at ARM shows he’s an experienced capital allocator, who is not afraid to make aggressive decisions for the good of the business shareholders.

So, why did Pabrai decide to sell the shares despite Rolls’ wide moat business and improving outlook? Simply put, the decision to sell was based on state intervention:

“Within a few weeks of investing in Rolls Royce, I realized I had made a mistake. Rolls Royce is a significant employer in the UK. There is a lot of fat to cut, but even Warren East simply could not make cuts that were so obvious to him. There was intense pressure from various stake holders in the UK, including the government, to preserve jobs. These dynamics just don’t exist at GE. As a result, I realized Rolls Royce will always underperform GE and will always be at a disadvantage that will grow over time.”

The Rolls-Royce position was sold at a 10% realized loss over an average holding period of 1.5 years.

While Rolls-Royce may have disappointed a $22.9 million position in Seritage Growth Properties provided a nice gain of 7% over an average holding period of 1.1 years. Nonetheless, despite this positive performance, Pabrai is glad to be rid of the position.

Mohnish Pabrai On Sears Bankruptcy and Seritage

In his annual 2016 letter to investors, Pabrai writes that his initial plan with Seritage was to “hold this remarkable asset for a very long time.” The owner of the Pabrai funds liked the business because it was diversifying away from former parent Sears and over the space of a decade the business would likely do very well from its prime real estate portfolio. At the time, analysis did not indicate that the bankruptcy of Sears was imminent and it’s the change of this viewpoint that caused Pabrai to alter his investment thesis.

“The logic for investing in Seritage is simple. Sears pays them $4-5/sq. ft. in annual rent. By spending $75-150/sq. ft., they can raise rents to between $18-50/sq. ft. Spending $75 to get an additional $13-15 per year is such a no-brainer. The unlevered ROI is very acceptable. With some leverage, it becomes quite attractive. And Seritage has an almost infinite supply of this type of redevelopment opportunity.”

Even though Sears is not bankrupt, the company is teetering on the edge and it’s only a matter of time before suppliers start pulling their products from shelves. Then there’s the problem of cutting corporate overheads, which Pabrai believes will not be a simple or pain-free process. Put simply, Sears is living on borrowed time and this is bad news for Seritage. Granted, over many years Seritage would be able to transition away from Sears and greatly improve the quality of its property portfolio but if Sears’ lease revenue disappears overnight, Seritage may struggle as a going concern.

Mohnish Pabrai finishes his section on Seritage by noting that he is still interested in the company although he would rather watch from the sidelines until Sears files for bankruptcy protection.

“After Sears files for bankruptcy, it may make sense for us to invest in Seritage again. I will be watching from the sidelines with keen interest.”

The post Mohnish Pabrai “After Sears files for bankruptcy” it may make sense to buy Seritage again appeared first on ValueWalk.

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

Earlier this year he wrote a great article called, Beyond Buffett: How To Build Wealth Copying 9 Other Value Investors. The article illustrates how you can build a successful portfolio by cloning other successful value investors.

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Here's an excerpt from that article:

I co-wrote this article in Forbes on an investment strategy called the “Shamelessly Cloned Portfolio.”

The shameless portfolio comprises of five of the highest conviction ideas of 9 value managers whom we shamelessly clone. Like the Small Dogs of the Dow and Uber Cannibals, we set it and forget it. I will publish the list of the top Shameless Cloned Ideas for a particular year on my blog on January 1 each year.

For 2017, even though it’ll be a partial year, one can buy the 2017 picks anytime. After that, rebalancing should occur right after January 1.

The Shameless Portfolio for 2017 contains:

Oracle (ORCL)
Berkshire Hathaway (BRK-B)
Apple (AAPL)
Microsoft (MSFT)
Charter Communications (CHTR)

We’ve laid out all our algorithm rules below.

One can begin testing this strategy with a small portion of one’s networth and do it through a great broker like Interactive Brokers with commissions under $3/trade for small quantities. We hope you’ll join our merry band of shameless cloners.

You can view the article here:

https://www.forbes.com/sites/janetnovack/2017/02/22/beyond-buffett-how-to-build-wealth-copying-9-other-value-stock-pickers/#7645cf00eaf9

I co-wrote the article with Fei Li, a talented quant at Dhandho Funds.

Enjoy!

Note, anyone who invests in any strategy needs to do their own research/due diligence and are themselves fully responsible for the outcome.

Appendix: Shameless Cloning Portfolio Rules

Selection Criteria:

No utilities, no REITs, no oil and gas exploration, no metals and mining and no multiline retailers.
Positive trailing-12-month net income

Rebalance Methodology:

Rebalance on Dec 31st of each year.
The old companies that are not in the new portfolio are sold. The “sell money” is accumulated and distributed equally among all new entrants.
If the same company is present in our portfolio for another year, then we leave it unchanged i.e. no rebalancing trades.
Dividends are reinvested into the same company that paid it.
If there is an involuntary removal through acquisition/delisting/bankruptcy then the cash is distributed equally among the remaining cloners.
If there are any spin-offs, the shares are sold and reinvested in the parent.?

This article was originally posted at The Acquirer's Multiple.

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I’ve just been re-reading one of my favorite investing books of all time, The Dhando Investor, written by Mohnish Pabrai. In Chapter 7, Dhandho 102: Invest in Simple Businesses, Pabrai provides a very simple example of how to calculate intrinsic value using the real life example of Bed Bath & Beyond Inc (NASDAQ:BBBY).

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It’s a great illustration of how intrinsic value is not an exact figure but a range that you can compare to the company’s current market value to determine whether you want to dig further into the company.

Here’s an excerpt from The Dhando Investor:

When we see a huge gap between the price and intrinsic value of a given business—and that gap is in our favor—we can act and buy that business. Let’s take the example of a well-known retail business, Bed Bath and Beyond (BBBY).

I have to admit that I have never analyzed BBBY before. I have been to its stores a few times over the years, and it has been a pleasant experience. As I write this, BBBY has a quoted stock price of $36 per share and a market cap of $10.7 billion. We know BBBY is being offered on sale for $10.7 billion. What is BBBY’s intrinsic value?

Let’s take a look at a few BBBY statistics on Yahoo Finance.

BBBY had $505 million in net income for the year ended February 28, 2005. Capital expenditures for the year were $191 million and depreciation was $99 million. The “back of the envelope” net free cash flow was about $408 million.

It looks like BBBY is growing revenues 15 percent to 20 percent and net income by 25 percent to 30 percent a year. It also looks like it stepped up capital expenditure (capex) spending in 2005. Let’s assume that free cash flow grows by 30 percent a year for the next three years; then grows 15 percent a year for the following three years, and then 10 percent a year thereafter. Further, let’s assume that the business is sold at the end of that year for 10 to 15 times free cash flow plus any excess capital in the business. BBBY has about $850 million in cash in the business presently (see Table 7.3).

So, the intrinsic value of BBBY is about $19 billion, and it can be bought at $10.7 billion. I’d say that’s a pretty good deal, but look at my assumptions—they appear to be pretty aggressive. I’m assuming no hiccups in its execution, no change in consumer behavior, and the ability to grow revenues and cash flows pretty dramatically over the years. What if we made some more conservative assumptions? We can run the numbers with any assumptions.

The company has not yet released numbers for the year ended February 28, 2006, but we do have nine months of data (through November 2005). We can compare November 2005 data to November 2004 data. Nine month revenues increased from $3.7 billion to $4.1 billion from November 2004 to November 2005. And earnings increased from $324 million to $375 million.

It looks like the top line is growing at only 10 percent annually and the bottom line by about 15 percent to 16 percent. If we assume that the bottom line growth rate declines by 1 percent a year—going from 15 percent to 5 percent and its final sale price is 10 times 2015 free cash flow, the BBBY’s intrinsic value looks like Table 7.4. Now we end up with an intrinsic value of $9.6 billion.

BBBY’s current market cap is $10.7 billion. If we made the investment, we would end up with an annualized return of a little under 10 percent. If we have good low-risk alternatives where we can earn 10 percent, then BBBY does not look like a good investment at all.So what is BBBY’s real intrinsic value?

My best guess is that it lies somewhere between $8 to $18 billion. And in these calculations, I’ve assumed no dilution of stock via option grants, which might reduce intrinsic value further. With a present price tag of around $11 billion and an intrinsic value range of $8 to $18 billion, I’d not be especially enthused about this investment. There isn’t that much upside and a fairly decent chance of delivering under 10 percent a year.

For me, it’s an easy pass.

Article by Johnny Hopkins, The Acquirer's Multiple

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Great video with Mohnish Pabrai speaking with the folks at Google. This whole presentation can be summed up at 27:05 when Pabrai says, “Spending time on [researching] companies is likely to make me bias”.

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

In other words when you’re looking for investment opportunities they should hit you over the head immediately. If they do not don’t spend enormous amounts of unnecessary time researching them. This will lead you to become bias towards the investment. Instead, move on and find another opportunity that does hit you over the head immediately.

He also provides some useful hacks that will help overcome some of our inherent biases.

Punch Card Investing Lessons from Charlie Munger

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Monish Pabrai Dhando — By Fabarsi (Own work) [CC BY-SA 3.0], via Wikimedia Commons

Article by Johnny Hopkins, The Acquirer's Multiple

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Here’s an excerpt from The Dhando Investor:

An Incredibly Powerful Value Investing Framework

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Let’s take a look at a few BBBY statistics on Yahoo Finance.

For me, it’s an easy pass.

This article originally appeared on The Acquirer's Multiple - Stock Screener.

Save

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Mohnish Pabrai visited Talks at Google on June 5, 2017. At the end of this talk Mohnish recommended three books.

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Invest for Kids 2016 - Sam Zell "Europe is for cheese, wine and museums... not for investing"

The Beak of the Finch: A Story of Evolution in Our Time, Jonathan Weiner

On a desert island in the heart of the Galapagos archipelago, where Darwin received his first inklings of the theory of evolution, two scientists, Peter and Rosemary Grant, have spent twenty years proving that Darwin did not know the strength of his own theory. For among the finches of Daphne Major, natural selection is neither rare nor slow: it is taking place by the hour, and we can watch.

In this dramatic story of groundbreaking scientific research, Jonathan Weiner follows these scientists as they watch Darwin's finches and come up with a new understanding of life itself. The Beak of the Finch is an elegantly written and compelling masterpiece of theory and explication in the tradition of Stephen Jay Gould.

With a new preface.

How To Develop A Superinvestor Mindset Like Buffett, Munger, Neff, Loeb, Lynch And Soros

Animated Video Of Charlie Munger's The Psychology Of Human Misjudgement Speech

Am I Being Too Subtle?: Straight Talk From a Business Rebel, Sam Zell

The traits that make Sam Zell one of the world’s most successful entrepreneurs also make him one of the most surprising, enigmatic, and entertaining mavericks in American business.

Self-made billionaire Sam Zell consistently sees what others don’t. From finding a market for overpriced Playboy magazines among his junior high classmates, to buying real estate on the cheap after a market crash, to investing in often unglamorous industries with long-term value, Zell acts boldly on supply and demand trends to grab the first-mover advantage. And he can find opportunity virtually anywhere—from an arcane piece of legislation to a desert meeting in Abu Dhabi.

“If everyone is going left, look right,” Zell often says. To him, conventional wisdom is nothing but a reference point. Year after year, deal after deal, he shuts out the noise of the crowd, gathers as much information as possible, then trusts his own instincts. He credits much of his independent thinking to his parents, who were Jewish refugees from World War II.

Talk to any two people and you might get wild swings in their descriptions of Zell. A media firestorm ensued when the Tribune Company went into bankruptcy a year after he agreed to steward the enterprise. At the same time, his razor-sharp instincts are legendary on Wall Street, and he has sponsored over a dozen IPOs. He’s known as the Grave Dancer for his strategy of targeting troubled assets, yet he’s created thousands of jobs. Within his own organization, he has an inordinate number of employees at every level who are fiercely loyal and have worked for him for decades.

Zell’s got a big personality; he is often contrarian, blunt, and irreverent, and always curious and hardworking. This is the guy who started wearing jeans to work in the 1960s, when offices were a sea of gray suits. He’s the guy who told The Wall Street Journal in 1985, “If it ain’t fun, we don’t do it.” He rides motorcycles with his friends, the Zell’s Angels, around the world and he keeps ducks on the deck outside his office.

As he writes: “I simply don’t buy into many of the made-up rules of social convention. The bottom line is: If you’re really good at what you do, you have the freedom to be who you really are.”

Am I Being Too Subtle?—a reference to Zell’s favorite way to underscore a point—takes readers on a ride across his business terrain, sharing with honesty and humor stories of the times he got it right, when he didn’t, and most important, what he learned in the process.

This is an indispensable guide for the next generation of disrupters, entrepreneurs, and investors.

Damn Right: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger, Janet Lowe

Praise for Damn Right!

From the author of the bestselling WARREN BUFFETT SPEAKS. . .

"Charlie Munger, whose reputation is deep and wide, based on an extraordinary record of brilliantly successful business strategies, sees things that others don't. There is a method to his mastery and, through this book, we get a chance to learn about this rare individual." -MICHAEL EISNER, Chairman and CEO, The Walt Disney Company

"Janet Lowe uncovers the iconoclastic genius and subtle charm behind Charlie Munger's curmudgeonly facade in this richly woven portrait of our era's heir to Ben Franklin. With a biographer's detachment, an historian's thoroughness, and a financial writer's common sense, Lowe produces a riveting account of the family, personal, and business life of the idiosyncratically complex and endlessly fascinating figure." -LAWRENCE CUNNINGHAM, Cardozo Law School, Author of The Essays of Warren Buffett: Lessons for Corporate America

"For years, Berkshire Hathaway shareholders and investors worldwide (me included) have struggled to learn more about Warren Buffett's cerebral sidekick. Now we can rest and enjoy reading Janet Lowe's book about this rare intellectual jewel called Charlie Munger." -ROBERT G. HAGSTROM, Author of The Warren Buffett Way

"Charlie has lived by the creed that one should live a life that doesn't need explaining. But his life should be explained. In a city where heroism is too often confused with celebrity, Charlie is a true hero and mentor. He lives the life lessons that he has studiously extracted from other true heroes and mentors, from Ben Franklin to Ben Graham. This book illuminates those life lessons." -RONALD L. OLSON, Munger, Tolles & Olson llp

"Janet Lowe's unprecedented access to Charlie Munger and Warren Buffett has resulted in a first-class book that investors, academics, and CEOs will find entertaining and highly useful."-TIMOTHY P. VICK, Money Manager and Author of How to Pick Stocks Like Warren Buffett

Article by Hurricane Capital

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Here’s a recent interview with Mohnish Pabrai on the Steve Pomeranz Hour in which he discusses his value investing strategy and how he finds great opportunities.

Here’s an excerpt from that interview:

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Mohnish Pabrai: The key trait of an investment that is likely to do well exhibits low risk coupled with high uncertainty. Because when you have high uncertainty, markets hate that and they will typically under-price companies with a lot of uncertainty.

A low uncertainty business is not going to be underpriced. What you want to look for is a business with very high uncertainty and there you can occasionally get extremist pricing and that's the time to step in. Like Charlie [Munger] did with Tennaco when the stock dropped to a dollar. I think he sold it for fifteen dollars but then it went to fifty dollars after that. So that's really what you want to do.

You can find the interview here. Part one starts around 9:30 minutes and part two starts around 40:00 minutes.

This article was originally published at The Acquirer's Multiple - Stock Screener.

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Mohnish Pabrai Lecture At University of California, Irvine (UCI), June 7, 2017

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Mohnish Pabrai I very much enjoyed speaking again with Steve Pomeranz for his “Great Investors” podcast series.

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We discussed the fundamental traits of a value investor and the importance of focusing on individual companies and ignoring the market. I also gave my thoughts on the investing environment today and how it is similar to the period when I started Pabrai Funds in 1999. And we discussed Warren Buffett’s comments on Amazon and Google during the Berkshire Hathaway Annual Meeting this year and whether the FAANGS are overpriced.

It is a two-part podcast. The podcast and the transcript can be accessed at:

Part 1:

Part 2:

Enjoy!

Article by Chai With Pabrai

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What causes a credit bubble to collapse

is not a malfunctioning entrepreneurial impulse, but an artificial lengthening of production and overcapacity in fixed assets induced by the fractional reserve banking system. Everyone who keeps funds in the market or in a bank is vulnerable, since it is cash deposits that banks use to fund the reckless expansion. When the banking system blows up—as it must—conservative savers lose their savings just as surely as ardent speculators: that is the real horror and also why the existence of a dynamic sector in the economy does not change the credit bubble analysis.

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A must read....

Myrmikan Performance Update - A True Hedge

The Bloomberg Investment Summit earlier this month achieved a general consensus among the storied experts that traditional macro indicators are no longer relevant due to the sophistication of the primary market operators. One could summarize: this time it’s different. And a lucky thing, too, because a debt-based economy can only grow with the creation of additional debt, and commercial and industrial loan growth is collapsing. The only times that this series has behaved similarly has been at the onset of major recessions, such in 1974, 1992, 2000, and 2008.

Note, as well, that the troughs on the chart above keep getting deeper. As the overall level of debt grows, debt revulsion becomes more pronounced and requires ever greater efforts from the central bank to resist the natural liquidating tendencies of the market.

Another place macro-indicators no longer matter, apparently, is China. Glenn Youngkin, the President and Chief Operating Officer of The Carlyle Group, forged another consensus that there are two Chinas, one public one private—or, as Deng Xiaoping said about Hong Kong: “One country, two systems.” The former, everyone knows, is bloated, debt-laden, inefficient, and unproductive. The latter is dynamic, innovative, and expanding. As long as investors concentrate on the latter, and China lets a billion flowers blossom, then harmonious growth is assured.

This story is doubtless correct in some measure. The existence of a healthy, entrepreneurial class in China should not surprise even China bears. As Adam Smith wrote three centuries ago:

The uniform, constant, and uninterrupted effort of every man to better his condition, the principle from which public and national, as well as private opulence is originally derived, is frequently powerful enough to maintain the natural progress of things towards improvement, in spite both of the extravagance of government and of the greatest errors of administration. Like the unknown principle of animal life, it frequently restores health and vigour to the constitution, in spite, not only of the disease, but of the absurd prescriptions of the doctor.

Smith’s optimism may pervade every time and every place, yet crises do happen, especially when Keynesian doctorates are writing the prescriptions. What causes a credit bubble to collapse is not a malfunctioning entrepreneurial impulse, but an artificial lengthening of production and overcapacity in fixed assets induced by the fractional reserve banking system. Everyone who keeps funds in the market or in a bank is vulnerable, since it is cash deposits that banks use to fund the reckless expansion. When the banking system blows up—as it must—conservative savers lose their savings just as surely as ardent speculators: that is the real horror and also why the existence of a dynamic sector in the economy does not change the credit bubble analysis. Authorities save the system by showering newly printed money on the most visible problems: half-built ship yards and airports and office towers and houses. Printing money cannot create capital or purchasing power—but it can reallocate it . . . from the dynamic and productive parts of the economy, from the private to the “public good.” And how many systems are there now in Hong Kong?

Holding gold is the best way to keep capital out of the “system” in order to preserve purchasing power during credit crises, for there is no means for the authorities to redirect the purchasing power and liquidity of gold, save confiscation—the reason gold has so often been confiscated. We likely remain distant from that outcome. In a more innocent time, such as the 1930s, the general belief that the government was here to help led to a widespread acquiescence of state power. No one believes that anymore. People support the state only in proportion to their share in the spoils, and gold hoarding at present is likely too small a phenomenon to whip the public into enough of a frenzy to jettison the Fifth Amendment (even Roosevelt provided compensation at the thenprevailing price).2

Gold mining shares are the other way to protect against a general credit collapse. On the one hand, they are not as safe as bullion—mining operations have great volatility, mines can be seized or easily taxed, and the very market on which the shares trade can become impaired. On the other hand, their enormous leverage to gold enables a much smaller amount of capital to be deployed for the same protection, making shares an efficient way to gain economic insurance. Nor do gold shares function only during civilizational stress: the annual standard deviation of a portfolio comprised of 87% the S&P 500 and 13% the Barrons Gold Miners Index and rebalanced annually since 1918 is 17.4% versus 18.4% for the S&P 500 alone. This reduction in volatility does not come at a cost—in fact, the return of the rebalanced portfolio is 70% higher than the S&P 500 alone. If we dial up the rebalanced BGMI component to 35%, then the volatility matches the S&P 500, but the excess return increases to 102%.

New Pabrai Video Talk at Google:

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I just finished re-reading one of my favorite investing books, The Dhando Investor, by Mohnish Pabrai. One of my favorite parts of the book covers Pabrai’s methodology when it comes to putting together an investment thesis. His thesis is in accordance with Buffett and Munger’s age old adage of keeping it simple.

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Charlie Munger: Less securities research is better for investors

It is vital to research a potential investment before you take the plunge. However, too much securities research can be damaging. Spending hours trawling over numbers, forecasts and spreadsheets only increase the likelihood that you will reach a positive conclusion. Therefore, Pabrai argues that best investment ideas are obvious from the start and if an idea requires extended, in-depth securities research, it should be avoided. To hammer this point home, Pabrai recites a story from Charlie Munger:

“A few years back, I had dinner at Charlie Munger's house with a small group of people. He posed the question to the group; he said that the Capital Group, a few years back, had set up a best ideas fund. They had asked each of their portfolio managers to give one stock, their highest-conviction idea, and then they created a best ideas fund, which was taking one pick from each of the managers. Charlie went on to say that this fund did not do well, it underperformed its benchmark and the S&P 500. He was asking the group why this was.

They tried setting up the best ideas fund multiple times, and each time it failed. He said, 'Before I answer the question why it failed, I want to give you a story from my days at Harvard Law School.' He said that sometimes when they had classes at Harvard Law, the professor would bring up a case where the facts were such where it wasn’t obvious which side was in the right. Then they would divide the class into two halves randomly. One half would argue for the defendant, and the other would argue against the defendant. The two sides went off and studied the facts and made their arguments. After all of that was done, when they surveyed the entire class, overwhelmingly the students who had argued for the motion believed strongly that they were right, and the people who had argued against the motion believe strongly that they were right. Before they had studied the facts, they did not have a leaning one way or the other. Charlie said the best ideas fund was simply a fund full of ideas which managers had spent the most time on, the ideas they were most excited about.”

Put simply, an investment plan should be simple, and the more time you spend on it, the more likely it is you will ignore the fundamentals. This isn’t the first time Pabrai has argued for the need for a simplified investment process. On the topic of simplicity, during a talk at Google in July 2014, he said:

“The most important thing is that, before you invest, you should be able to explain the thesis without a spreadsheet within four or five sentences. Typically I write down those sentences before I invest, so if I have a conversation with someone you could very quickly explain why this investment makes sense.”

Benjamin Graham: Less securities research will help you outperform

The notion that simple is best in investing has been around for decades, but Wall Street is not interested. It would be difficult to justify investment banks’ multi-million dollar fees and investment advisers’ commissions if they just picked the easiest investment they could find.

The godfather of value investing, Benjamin Graham himself actually advocated this approach. Between September 1946 and February 1947, Benjamin Graham presented a series of lectures entitled, Current Problems In Security Analysis at the New York Institute of Finance. Throughout the series, he covered various topics including estimating a company’s future earnings power and placing an appropriate multiple on the shares based on this assessment. After warning students about the dangers of placing a high multiple on the company’s shares just because they like the business more than its peers, Graham went on to warn against spending too much time researching a company and its prospects due to the problems of forecasting:

“A thing I would like to warn you against is spending a lot of time on over-detailed analyses of the company’s and the industry’s position, including counting the last bathtub that has been or will be produced; because you get yourself into the feeling that, since you have studied this thing so long and gathered together so many figures, your estimates are bound to be highly accurate. But they won’t be. They are only very rough estimates, and I think I could have given, and probably you could have given me, these estimates in American Radiator in half an hour, without spending perhaps the days, or even weeks, of studying the industry.”

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As investors we all know the excitement we feel when we come across what we think is an undervalued opportunity that seems to have been overlooked by most other investors. The feeling of exhilaration that we get is called “cocaine brain.” Neuroscientists have found that the prospect of making money stimulates the same primitive reward circuits in the brain that cocaine does.

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The only problem with ‘cocaine brain’ is that it often leads investors to overlook the negative aspects of the opportunity as they’re overcome with the prospect of making thousands of dollars.

Fortunately, there is a solution used by Mohnish Pabrai and Guy Spier to dampen down your ‘cocaine brain’ and it can be found in the book The Checklist Manifesto: How to Get Things Right by Atul Gawande. This same book is referred to by Michael Mauboussin as ‘superb’ in his paper called – Managing the Man Overboard Moment – Making an Informed Decision After a Large Price Drop. His paper provided answers on how to keep your emotions in check in the face of adversity, which includes making informed decisions after a large price drop in one of the stocks your holding.

The Checklist Manifesto includes a discussion with Pabrai and Spier on their process for dealing with these exciting investment decisions using a systematic approach that helps to curb their emotions. Here’s an excerpt from that book:

Recently, I spoke to Mohnish Pabrai, managing partner in Pabrai Investment Funds in Irvine, California. He is one of three investors I’ve recently met who have taken a page from medicine and aviation to incorporate formal checklists into their work.

All three are huge investors: Pabrai runs a $500 million portfolio; Guy Spier is head of Aquamarine Capital Management in Zurich, Switzerland, a $70 million fund. The third did not want to be identified by name or to reveal the size of the fund where he is a director, but it is one of the biggest in the world and worth billions.

The three consider themselves “value investors”—investors who buy shares in underrecognized, undervalued companies. They don’t time the market. They don’t buy according to some computer algorithm. They do intensive research, look for good deals, and invest for the long run. They aim to buy Coca-Cola before everyone realizes it’s going to be Coca-Cola.

Pabrai described what this involves. Over the last fifteen years, he’s made a new investment or two per quarter, and he’s found it requires in-depth investigation of ten or more prospects for each one he finally buys stock in. The ideas can bubble up from anywhere—a billboard advertisement, a newspaper article about real estate in Brazil, a mining journal he decides to pick up for some random reason. He reads broadly and looks widely. He has his eyes open for the glint of a diamond in the dirt, of a business about to boom.

He hits upon hundreds of possibilities but most drop away after cursory examination. Every week or so, though, he spots one that starts his pulse racing. It seems surefire. He can’t believe no one else has caught onto it yet. He begins to think it could make him tens of millions of dollars if he plays it right, no, this time maybe hundreds of millions.

“You go into greed mode,” he said. Guy Spier called it “cocaine brain.” Neuroscientists have found that the prospect of making money stimulates the same primitive reward circuits in the brain that cocaine does. And that, Pabrai said, is when serious investors like himself try to become systematic. They focus on dispassionate analysis, on avoiding both irrational exuberance and panic. They pore over the company’s financial reports, investigate its liabilities and risks, examine its management team’s track record, weigh its competitors, consider the future of the market it is in—trying to gauge both the magnitude of opportunity and the margin of safety.

The patron saint of value investors is Warren Buffett, among the most successful financiers in history and one of the two richest men in the world, even after the losses he suffered in the crash of 2008. Pabrai has studied every deal Buffett and his company, Berkshire Hathaway, have made—good or bad—and read every book he could find about them. He even pledged $650,000 at a charity auction to have lunch with Buffett. “Warren,” Pabrai said—and after a $650,000 lunch, I guess first names are in order —“Warren uses a ‘mental checklist’ process” when looking at potential investments. So that’s more or less what Pabrai did from his fund’s inception. He was disciplined. He made sure to take his time when studying a company. The process could require weeks. And he did very well following this method—but not always, he found. He also made mistakes, some of them disastrous.

These were not mistakes merely in the sense that he lost money on his bets or missed making money on investments he’d rejected. That’s bound to happen. Risk is unavoidable in Pabrai’s line of work. No, these were mistakes in the sense that he had miscalculated the risks involved, made errors of analysis. For example, looking back, he noticed that he had repeatedly erred in determining how “leveraged” companies were—how much cash was really theirs, how much was borrowed, and how risky those debts were. The information was available; he just hadn’t looked for it carefully enough.

In large part, he believes, the mistakes happened because he wasn’t able to damp down the cocaine brain. Pabrai is a forty-five-year-old former engineer. He comes from India, where he clawed his way up its fiercely competitive educational system. Then he secured admission to Clemson University, in South Carolina, to study engineering. From there he climbed the ranks of technology companies in Chicago and California. Before going into investment, he built a successful informational technology company of his own. All this is to say he knows a thing or two about being dispassionate and avoiding the lure of instant gratification. Yet no matter how objective he tried to be about a potentially exciting investment, he said, he found his brain working against him, latching onto evidence that confirmed his initial hunch and dismissing the signs of a downside. It’s what the brain does.

“You get seduced,” he said. “You start cutting corners.” Or, in the midst of a bear market, the opposite happens. You go into “fear mode,” he said. You see people around you losing their bespoke shirts, and you overestimate the
dangers.

He also found he made mistakes in handling complexity. A good decision requires looking at so many different features of companies in so many ways that, even without the cocaine brain, he was missing obvious patterns. His mental checklist wasn’t good enough.

“I am not Warren,” he said. “I don’t have a 300 IQ.” He needed an approach that could work for someone with an ordinary IQ. So he devised a written checklist.

Apparently, Buffett himself could have used one. Pabrai noticed that even he made certain repeated mistakes. “That’s when I knew he

The post Here’s How Successful Investors Dampen Down Their Investing ‘Cocaine Brain’ – Pabrai, Spier appeared first on ValueWalk.