Interview with deep value investor Monish Pabrai

Discussion in 'Wall St. News' started by makloda, Jul 21, 2007.

  1. July 11, 2007

    It is my privilege to bring you the following interview I recently conducted with value investing superstar Mohnish Pabrai. Mohnish is my favorite investor who doesn't have the initials W.B. His stock selection style is similar to mine, except that he's more successful at it. Much, much more successful.

    I'll let the numbers speak for themselves: A $100,000 investment in Pabrai Funds at inception (on July 1, 1999) was worth $722,200 on March 31, 2007. That works out to an annualized return of 29.1%, and that's after all fees and expenses. Assets under management are over $500 million, up from $1 million at inception. Although a person probably can't get into the investing hall of fame with eight years of outperformance (even if they crush the indices), Pabrai is already mentioned in most articles about the search for the next Warren Buffett, and justifiably so.

    Equally importantly, he genuinely wants to help others become better investors, and in that spirit has just published his second book, The Dhandho Investor. The book is both illuminating and easy to read, and it deserves to be on every investor's bookshelf next to Benjamin Graham's The Intelligent Investor. This is why I felt extremely fortunate when he recently agreed to answer some questions about his investment strategy in this exclusive interview, conducted by email. I hope you find it useful, and I hope it inspires you to pick up a copy of his book if you haven't already.

    InvestorGuide: You have compared Pabrai Funds to the original Buffett parternships, and there are obvious similarities: investing only in companies within your circle of competence that have solid management and a competitive moat; knowing the intrinsic value now and having a confident estimate of it over the next few years, and being confident that both of these numbers are at least double the current price; and placing a very small number of very large bets where there is minimal downside risk. Are there any ways in which your approach differs from that of the early Buffett partnerships (or Benjamin Graham's approach), either because you have found ways to improve upon that strategy or because the investing world has changed since then?

    Mohnish Pabrai: The similarity between Pabrai Funds and the Buffett Partnerships that I refer to is related to the structure of the partnerships. I copied Mr. Buffett's structure as much as I could since it made so much sense. The fact that it created a very enduring and deep moat wasn't bad either. These structural similarities are the fees (no management fees and 1/4 of the returns over 6% annually with high water marks), the investor base (initially mostly close friends and virtually no institutional participation), minimal discussion of portfolio holdings, annual redemptions and the promotion of looking at long term results etc. Of course, there is similarity in investment style, but as Charlie Munger says, "All intelligent investing is value investing."

  2. Read his book Dhando Investor. The section on the Patels was particularly enlightening. I follow his teachings in every trade. Good stuff!
  3. Rahula


    I like this exchange:

    InvestorGuide: Some investment strategies stop working as soon as they become sufficiently popular. Do you think this would happen if everyone who reads The Dhandho Investor starts following your strategy? As I've monitored successful value investors I have noticed the same stocks appearing in their various portfolios surprisingly often. (As just one example, you beat Buffett to the convertible bonds of Level 3 Communications back in 2002, which I don't think was merely a coincidence.) If thousands of people start following your approach (using the same types of screens to identify promising candidates and then using the same types of filters to whittle down the list), might they end up with just slightly different subsets of the same couple dozen stocks? If so, that could quickly drive up the prices of those companies (especially on small caps, which seem to be your sweet spot) and eliminate the opportunities almost as soon as they arise. Looked at another way, your portfolio typically has about ten companies, which presumably you consider the ten best investments; if you weren't able to invest in those companies, are there another 10 (or 20, or 50) that you like almost as much?

    Pabrai: As long as humans vacillate between fear and greed, there will be mispriced assets. Some will be priced too low and some will be priced too high. Mr. Buffett has been talking up the virtues of value investing for 50+ years and it has made very few folks adopt that approach. So if the #2 guy on the Forbes 400 has openly shared his secret sauce of how he got there for all these decades and his approach is still the exception in the industry, I don't believe I'll have any effect whatsoever.

    Take the example of Petrochina. The stock went up some 8% after Buffett's stake was disclosed. One could have easily bought boat loads of Petrochina stock at that 8% premium to Buffett's last known buys. Well, since then Petrochina is up some eight-fold - excluding some very significant dividends. The entire planet could have done that trade. Yet very very few did. I read a study a few years back where some university professor had documented returns one would have made owning what Buffett did - buying and selling right after his trades were public knowledge. One would have trounced the S&P 500 just doing that. I don't know of any investors who religiously follow that compelling approach.

    So, I'm not too concerned about value investing suddenly becoming hard to practice because there is one more book on a subject where scores of excellent books have already been written.
  4. Daal


    One thing im curious about is the tax treatment for US investors of his fund. Do they have to pay taxes on gains yearly or just when they withdraw(ala soros)?If they pay yearly that 29% annualized is not really correct in case you live in the real world
  5. doublea


    He recently paid more than $600,000 to have lunch with Buffet. He said that he will not ask much investment related questions but more about Buffet's value and Buffet's approach to raising kids.

    One of the stocks he currently owns is RAIL.
  6. You don't pay taxes necessarily on "percentage increases". You only pay tax when there is a realized gain in the fund, or when you yourself liquidate the fund. In other words, it has to be a taxable event.

  7. Daal


    so by the end of the year you would receive information on what were the events then you would need to pay even though the money is still invested there?No wonder a moron like george soros can compete with buffett, he only pays on liquidation
  8. Interesting thought process.

    On the investorguide website I noticed C (Citygroup) was the stock of the day. curious
  9. He doesn't buy much stock, does he now?

    (As just one example, you beat Buffett to the convertible bonds of Level 3 Communications back in 2002, which I don't think was merely a coincidence.) ..

    And neither does Buffet. Both invest heavily in secured debt instruments, which under normal circumstances are unavailable to retail.
  10. I don't see the wisdom of spending $600,000 to eat lunch with guy whose own stock hasn't done much for him all this year. Warren Buffet may be a great guy but look at the chart of BRK.A and BRK.B they are both range bound and the Technical charts suck.

    If this Mohnish Pabri took $600,000 and bought GOOG, AAPL, RIMM and AMZN since May 2007 he would be sitting on a $120,000 in profits! Thats is a 20% return without eating a steak with man whose own stock doesn't seem to match these four horseman of Tech!

    As if this stupidity wasn't enough, Mohnish Pabri sunk a good chunk of his $500 million portfolio into BRK.A and BRK.B for safekeeping! LOL!

    What an idiot!
    #10     Jul 23, 2007