Mohnish Pabrai's Interview

What are the factors you look at before deciding to invest in a company? Can you give us an example?
The first thing you got to look at is, "I am not buying a stock, but I am buying a business." And you only buy the business if you were willing to buy the entire business if you had money for it. So, for example, if Reliance Industries has a market cap of $100 billion and you had a $300 billion, the question you would ask yourself is, would I buy the entire business for a $100 billion?

The first thing is that you are not buying pieces of paper, but you are buying an entire business. The second is that you ask yourself, do I understand the business? Do I truly understand how it will work, how it makes money, how will it do in the future?

Then the third thing is, if Reliance produces$3 billion a year cash flow and it trades for $100 billion, I have no intention of buying it at 33 times cash flow. It is like I have no interest in putting money in an account that pays 3% interest.

So I love Reliance, maybe, if the fair value of business is 15 times cash flow, which is $45 billion. And since I am cheapskate, I don't want to buy it for more than half its fair value, so I just say to myself, that if it goes below $20 billion in value -- or one-fifth the current price -- then I will look at it again. In fact, that is the way to look at the Indian Sensex. You take all the Reliances, the Wipros and Infosyses of the world, chop their price by four, and that's your entry price.

What has been your most successful stockpick till date?
You know that's a very funny question. The most successful company I ever invested in is Satyam. I invested in 1995, and I was completely out by 2000. When I invested the stock was at Rs 40, and Satyam's earnings at that time were about at Rs 12 a share, so you were buying a business for three-and-a-half times earnings. And the more interesting thing for me was that property the company had in Hyderabad exceeded the market capitalisation as it was carried at a value that was bought a long time ago.

The only reason I knew about Satyam was because I was in the IT services space. These guys had actually visited us to see if they could do business together. And I had been pretty impressed by the way the business operated and the people I had met.

I looked at it from my investment point of view after was amazed that such a business could trade at such a price. So I invested in Satyam. In 2000, it was trading at Rs 7,000, that is about a 150 times the price I bought it at. This was in the days before demat, and actually when I bought the stock with an account through Kotak that I had in Mumbai, I was given physical delivery of these shares that looked like tattered pieces of paper that were falling apart.

Satyam from less than a PE of 3 to more than PE of 100. I just said I am out of it because now I owned a bubble stock even though I did not buy it at bubble price. I sold my entire position within 5% of the peak. Within six months it had dropped from Rs 7,000 to Rs 1,000, and continued on the sidelines for a while. That was the best deal that I ever made.

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Pabrai's Annual Meeting at Chicago Sept 2007

These are some of the things that Mohnish Pabrai said during his annual meeting.

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Pabrai was asked about possibility of investing in commodities, such as gold.

He responded by quoting Buffett, saying, "If Martian were to to observe the activity of human beings for many many years, they would not understand what these humans were doing. They are digging the gold out from the ground, proccess them and put them in the vaults and never touch them again."

He only wants to invest in companies with businesses that Martian could understand.

Another question was what he thought about relationship between volatility of the market to stock market valuation.

His response was.... "You have asked the wrong person, you should ask Chicago Business School." What a great response. Plenty of applause from the crowd.

Understanding his investment in Ipsco.

When he invested in Ipsco, 1/3 of its market cap was cash. It was selling at 2X free cash flow. It has high visibility of earnings for 2 years, but uncertainty after that. Mohnish's thinking was after 2 years of investment, the total amount of cash generated and those on the balance sheet would be equivalent to the total worth of the company at the time of investment. Thus, he would get the steel business for free.

Despite not knowing the intrinsic value of Ipsco at the time of purchase, it was a high uncertainty, but low risk bet. Ipsco was eventually bought out and he earned over 100% of return. Dhandho!

Understanding his investment in Lear Corp.

Duopoly business. The other automotive seat maker is Johnson Controls. High ROIC and has been growing revenue 13% per year for the last 10 years. Problems started in 2005 when commodity prices increased and they were unable to pass the costs to its clients. However, as contracts were running out, Lear could renegotiate its contracts and pass the price increases to clients.

Mohnish sold his position when Icahn offered to buy out Lear. As the deal fell through, Lear is still a listed company. Mohnish mentioned that he might be interested in buying Lear again if price falls below $25/share. So, keep an eye on Lear.

Would he ever hire an analyst?

No. Mohnish said that Buffett, despite managing billion of dollars, is basically one man business. The more brains get into investment, the worse the performance would be. He also quoted Munger for saying.."Nothing useful comes out of a committee."

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I was very grateful to have the chance to ask Mohnish a few questions that are relevant to me.

One of the questions was... prior to setting up his fund, has he thought of working for anyone else besides Buffett?

His answer was no. Buffett is the best. He has not thought of working for anyone besides Buffett.

As I don't have any business background and is a self-taught value investor, I asked him what he thought of CFA?

He told me I can skip the CFA. :)

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All the above are recollection from my memory, so they might not be the exact words of Mohnish.

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If you are interested in seeing some of the photos I have taken at Mohnish Pabrai's meeting, please visit: Mohnish Pabrai 2007 AGM at Chicago

Sham Gad: Don't Invest in the Most Valuable Business

Pabrai examined this list and determined that if you had started with $10,000 invested in the most valuable businesses in 1987, when Fortune released its list, and every subsequent year reinvested the funds in what was at the time the most valuable business, in 2002 you'd have an annualized gain of 3.3%. During the same period, the S&P delivered about a 10% annualized return.

You can clearly see from the results that the maximum pessimism approach would yield a far more superior result. As the saying goes, what has risen shall fall, and what has fallen shall soon rise again. Surely not every stock that deteriorates will again rise -- it's up to you to provide the thorough analysis and determine whether or not a superior investment opportunity exists.

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Mohnish Pabrai: Take-Home Lessons on Value Investing

Do you want greater investment returns? You need to assume more risk. So says academic finance, which rests almost entirely on the principle that reward necessarily entails and is commensurate with risk. Indeed this assumption has at least an element of truth to it, inasmuch as stocks are riskier than bonds, and also tend to deliver greater returns than bonds over longer (say, multiyear) periods of time.

Hedge fund manager and author of "The Dhandho Investor," Mohnish Pabrai, begs to differ with the academics. Like so many value investors who've come before him (and to whom he's duly deferential), Pabrai provides a framework for selecting unloved, overlooked, forgotten, and seemingly boring businesses that are selling at cheap enough prices to minimize risk and maximize returns.

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Mohnish Pabrai: Delta Financial (DFC) Results

"Liquidity has become one of the most important issues facing lending institutions today as the credit disruption widens and rating agencies modify their reserve level requirements," explained Hugh Miller, president and chief executive officer. "This has created a capital intensive environment in which it is increasingly more costly to operate. While our adherence to Delta's proven business model, with a focus on fixed rate loans and a diversified wholesale/retail origination platform, provided some insulation and helped us generate positive earnings during the second quarter, it became apparent this current environment would unduly strain our liquidity."

"Accordingly, I am pleased to announce we have entered into two transactions to help strengthen our Company and provide additional financial flexibility," continued Mr. Miller. "First, we obtained a $60.0 million financing facility from an affiliate of Angelo, Gordon & Co., a leading alternative asset management firm. The financing is collateralized by all of our currently existing securitization cashflow certificates. As part of the transaction, Angelo, Gordon & Co. will receive warrants to purchase 10.0 million shares of our Common Stock with an initial exercise price of $5.00 per share, expiring February 2009, subject to extension if we do not obtain stockholder approval for the warrant issuance within 90 days of the closing date. The fair value of the warrants issued will be amortized to interest expense as a non-cash yield adjustment over the life of the associated financing facility."

"At the same time, we have agreed to issue $10.0 million of convertible notes to funds managed by Mr. Mohnish Pabrai, one of our largest stockholders," Mr. Miller explained. "The notes are convertible into an aggregate of 2.0 million shares of our Common Stock, at a conversion price of $5.00 per share. The exercise of most of the warrants and the issuance of all of the shares upon conversion of the notes are both subject to shareholder approval, which we intend to pursue in the near future."

Mohnish Pabrai stated, "Delta is one of the best companies and management teams in this space. I look for them to emerge from the current market disruption and be well-positioned to take advantage of a less populated competitive landscape."

Press Release

Peter Lindmark: Simplicity and Focusing on the Big Picture

Our life is frittered away by detail... simplify, simplify." Henry Thoreau

Einstein listed the five ascending levels of intellect as: “Smart, Intelligent, Brilliant, Genius, Simple." Investors are detailed oriented and most never get to simple. Analysts have hundred page spreadsheets and focus intently on miniscule details, which are irrelevant over three to five year periods. Most investors miss the big picture due to their overly analytical minds.

“Keep the big picture in mind.” Joel Greenblatt

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Mohnish Pabrai: Morningstar Interview

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Mohnish Pabrai: 10 Questions & The Answers

How does your investment philosophy differ from Warren Buffett’s and Charlie Munger’s and why? As a follower of Warren Buffett you insist in buying into companies with a "moat"; nevertheless the kind of companies you tend to invest in do not appear to have wide moats as generally described by Warren Buffett and reflected in his holdings like Coca Cola, Gillette or American Express. Could you please expand on your definition of a moat and contrast it with Warren's definition? Warren Buffett stated that his ideal holding period is 'forever,' and that 20 investments in a lifetime are more than enough for any individual investor. Do you agree with these statements, or should one be more flexible in their investing strategy?

There are many different approaches that Buffett has applied over his long career. Even today, Buffett’s investing approach when investing for his own account differs significantly from his approach when allocating capital for Berkshire . Berkshire is a very inefficient vehicle for investing in stocks. Gains are taxed at 35%. In addition, shareholders are taxed when they sell Berkshire stock. Plus Berkshire is drowning in cash. With these realities, the best approach for Berkshire is to buy and hold stocks for a long long time.

If you’re a buy and hold forever investor, then having a very durable moat becomes extremely critical. Berkshire needs to invest in businesses that have very high returns on equity (Coke, Moody’s American Express), the ability to redeploy earnings at high rates of return and it needs to buy into these businesses below intrinsic value so that the annualized return is atleast the returns the businesses generate on their equity. Very very few businesses generate ROE exceeding 15-20% annually and have the ability to redeploy earnings at greater than 15-20% ROE. Thus it is unlikely Berkshire ’s stock portfolio can generate long term returns exceeding 15%. Their float helps then get higher effective returns. Buffett once said that float added about 7% to Berkshire annualized returns.

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Tom Murcko: InvestorGuide.com: Interview with Value Investor Mohnish Pabrai

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."

InvestorGuide: Another possible difference between your style and Buffett's relates to the importance of moats. Your book does emphasize investing in companies that have strategic advantages which will enable them to achieve long-term profitability in the face of competition. But are moats less important if you're only expecting to hold a position for a couple years? Can you see the future clearly enough that you can identify a company whose moat may be under attack in 5 or 10 years, but be confident that that "Mr. Market" will not perceive that threat within the next few years? And how much do moats matter when you're investing in special situations? Would you pass on a special situation if it met all the other criteria on your checklist but didn't have a moat?

Pabrai: Moats are critically important. They are usually critical to the ability to generate future cash flows. Even if one invests with a time horizon of 2-3 years, the moat is quite important. The value of the business after 2-3 years is a function of the future cash it is expected to generate beyond that point. All I'm trying to do is buy a business for 1/2 (or less) than its intrinsic value 2-3 years out. In some cases intrinsic value grows dramatically over time. That's ideal. But even if intrinsic value does not change much over time, if you buy at 50 cents and sell at 90 cents in 2-3 years, the return on invested capital is very acceptable.

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Source: Tom Murcko. Thank you for sharing.

Mohnish Pabrai: Rs 2.6cr for lunch is my guru dakshina

Q: I'm thinking you might have paid about $10,000 per minute for this lunch if it lasts an hour...

A: The lunch typically lasts three hours. It is really a bargain basement price for the honour. I have gained so much from Mr Buffett that I consider this a small guru dakshina. I owe him a debt. I have learnt much from him, but I have never given back to him.

Q: Have you ever met Mr Buffett before? You must have attended the annual Berkshire fete in Omaha?

A: I think I've been there every year for the past ten years. I've met him briefly at investor meets, but I have never been introduced to him.

Q: As a self-confessed Buffett buff, you have studied him so closely. What remains to be asked?

A: Just to be with him, to talk about life, about his perspectives, should be good enough. I also want to learn from him about philanthropy and apply some of his principles to my own Dakshana Foundation. I consider this as the first grant my foundation is making (the Buffett lunch bid money goes to the Glide Foundation which helps the poor and homeless in San Francisco)

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Source: Lincoln Minor

Mohnish Pabrai: Summary of Dhandho Investor Book by Bjorn Kijl

Thank you Bjorn for this wonderful sharing.

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Mohnish Pabrai on CNBC

The winner of this year's Buffett charity lunch auction on eBay, with Mohnish Pabrai, Pabrai Funds managing partner and CNBC's

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Source: Lincoln Minor

Mohnish Pabrai: Lunch With Warren Buffett? $650,100

Two investors put in the winning bid of $650,100 in a charity auction to break bread with billionaire Warren Buffett.

Mohnish Pabrai, who will put up most of the money, said Saturday that he's going to be well-prepared by the time he meets the famed investor at a New York steakhouse.

"I'll probably download the menu and see what we want so we don't waste our time looking at the menu," Pabrai. "My wife's not a big fan of steakhouses — but I told her they serve fish as well."

Pabrai, his wife and two daughters will join his bidding partner, Guy Spier of Aquamarine Capital Management LLC, and Spier's wife at the dinner with Buffett, the chairman and chief executive of Berkshire Hathaway, Inc. The group will dine at the Smith & Wollensky steakhouse in New York City.

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Source: Fu Lu

Mohnish Pabrai: Won Power Lunch with Warren Buffett

Warren Buffett Power Lunch to Benefit Glide Foundation

Winning bid: US $650,100.00

Winning bidder: mpabrai

Ebay Results

Well done, Mr. Pabrai!

May you learn plenty from Mr. Buffett in person.

Kind regards,

David

Mohnish Pabrai: Pabrai Funds shareholder meeting 2001 transcripts

5. Any insights gained after last two years in regard to portfolios that have changed your rules?

Mohnish: One change occurred a little overone year ago. I got a hold of the Buffett Partnership letters and was surprised to see that a huge portion of the portfolios was comprised of Special Situations. I then researched Special Situations in much greater detail. Now we have up to 30% of the portfolio in Special Situations.

6. Even Great Companies have bad things that happen to them. How do you keep portfolios abreast of thesebad things?

Mohnish: If nothing bad happened to any of the stock, wed be at a 70+% annual rate of return. Some bad things will happen. The whole point is to have 10 securities. One or two may have some bad things happen, but the majority will be fine.

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Mohnish Pabrai: Pabrai’s Perfect Portfolio

Mohnish Pabrai’s portfolio is not perfect because of what is inside, but rather because of how the fund is assembled. Pabrai is the managing partner of the Pabrai Investment Funds, a partnership with $500 million under management. Besides the 29% returned annually to partners, Pabrai has designed brilliant portfolio concepts.

Incalculable amounts of time are spent studying which investments to buy, but very little time is spent thinking about how much. The decision is usually left up to the investor’s confidence in the investment, something that has been shown to be unstable. The truth is, deciding how much to buy can have a large impact on a portfolio, occasionally just as much as what is bought. There are copious amounts of information on what to buy, but very little on how much.

To combat his untrustworthy feelings of self-confidence, Pabrai developed a new “portfolio theory.” I will call it the ten by ten portfolio. Ten investments that each make up ten percent of the portfolio. Pabrai holds between seven and fifteen different investments, but appears to stay close to the ten by ten benchmark. The fund is difficult to proportion perfectly, because a stock can run up before a full lot has been purchased or because a previous position has already advanced.

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Mohnish Pabrai: Bloomberg Interview June 19, 2007

Bloomberg Clip Jun 19, 2007

Analysis and Discussion with Featured Guest Mohnish Pabrai of Pabrai Investment Funds: Stocks More Affected By Micro Factors than Macro Economy; Entrepeneurs Are Good at Handling Uncertainty - High Uncertainty, Low Risk

Bloomberg Clip Part 1

Analysis and Discussion on in Investing with Buffett, with Featured Guest Mohnish Pabrai: Berkshire's Businesses, Investments Worth $5K/share; Delta Financial - Provides Fixed Rate Loans, Not Exposed to Resets, Would Be Little Impacted by Housing Correction

Bloomberg Clip Part 2

Source: Thank you Lincoln Minor

Mohnish Pabrai: Low Risk and High Uncertainty Method of Scoring Big with Harvest Natural Resources

Venezuela's National Assembly approved the corporate structure for Petrodelta, an oil company that Harvest Natural Resources Inc. has a 40% stake in, according to Venezuela's Official Gazette released Monday.

Harvest Natural Resources' stock jumped over 37% today!

Well done, Mr. Pabrai.

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Source: Thank you Lincoln Minor

Mohnish Pabrai: 13F-HR May 15, 2007

Pabrai 13F - HR

Source: Letsvalue

Billionaire Bets

Putting your money where the billionaires are investing right now, with David Winters, Wintergreen Advisers CEO; Mohnish Pabrai, Pabrai Funds managing partner and CNBC's Maria Bartiromo

Thank you Shai for the link.

Please visit: CNBC.com.