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."
My thoughts on this front are covered in more detail in Chapter 14 of The Dhandho Investor.
Regarding the investment style, Mr. Buffett is forced today to mostly be a buy and hold forever investor today due to size and corporate structure. Buying at 50 cents and selling at a dollar is likely to generate better returns than buy and hold forever. I believe both Mr. Munger and he would follow this modus operandi if they were working with a much smaller pool of capital. In his personal portfolio, even today, Mr. Buffett is not a buy and hold forever investor.
In the early days Mr. Buffett (and Benjamin Graham) focused on buying a fair business at a cheap price. Later, with Mr. Munger's influence, he changed to buying good businesses at a fair price. At Pabrai Funds, the ideal scenario is to buy a good business at a cheap price. That's very hard to always do. If we can't find enough of those, we go to buying fair businesses at cheap prices. So it has more similarity to the Buffett of the 1960s than the Buffett of 1990s. BTW, even the present day Buffett buys fair businesses at cheap prices for his personal portfolio.
Value investing is pretty straight-forward - you try to get $1 worth of assets for much less than $1. There is no way to improve on that basic truth. It's timeless.
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.
If you're buying and holding forever, you need very durable moats (American Express, Coca Cola, Washington Post etc.). In that case you must have increasing intrinsic values over time. Regardless of your initial intrinsic value discount, eventually your return will mirror the annualized increase/decrease in intrinsic value.
At Pabrai Funds, I've focused on 50+% discounts to intrinsic value. If I can get this in an American Express type business, that is ideal and amazing. But even if I invest in businesses where the moat is not as durable (Tesoro Petroleum, Level 3, Universal Stainless), the results are very acceptable. The key in these cases is large discounts to intrinsic value and not to think of them as buy and hold forever investments.
Pabrai: Buffett has a quote that goes something like: "Can you really explain to a fish what it's like to walk on land? One day on land is worth a thousand years of talking about it, and one day running a business has exactly the same kind of value." And of course he's said many times that he's a better investor because he's a businessman and he's a better businessman because he is an investor. My experience as an entrepreneur has been very fundamental to being any good at investing.
My dad was a quintessential entrepreneur. Over a 40-year period, he had started, grown, sold and liquidated a number of diverse businesses - everything from making a motion picture, setting up a radio station, manufacturing high end speakers, jewelry manufacturing, interior design, handyman services, real estate brokerage, insurance agency, selling magic kits by mail - the list is endless. The common theme across all his ventures was that they were all started with virtually no capital. Some got up to over 100 employees. His downfall was that he was very aggressive with growth plans and the businesses were severely undercapitalized and over-leveraged.
After my brother and I became teenagers, we served as his de facto board of directors. I remember many a meeting with him where we'd try to figure out how to juggle the very tight cash to keep the business going. And once I was 16, I'd go on sales calls with him or we'd run the business while he was traveling. I feel like I got my Harvard MBA even before I finished high school. I did not realize it then, but the experience of watching these businesses with a front-row seat during my teen years was extremely educational. It gave me the confidence to start my first business. And if I have an ability to get to the essence of a subset of businesses today, it is because of that experience.
TransTech was an IT Services/System Integration business. We provided consulting services, but did not develop any products etc. So it wasn't a tech-heavy business. While having a Computer Engineering degree and experience was useful, it wasn't critical. TransTech taught me a lot about business and that experience is invaluable in running Pabrai Funds. Investing in technology is easy to pass on because it is a Buffett edict not to invest in rapidly changing industries. Change is the enemy of the investor.
Being an investor is vastly easier than being a CEO. I've made the no-brainer decision to take the easy road! I do run a business even today. There are operating business elements of running a fund that resemble running a small business. But if I were to go back to running a business with dozens of employees, I think I'd be better at it than I was before the investing experience. Both investing and running a business are two sides of the same coin. They are joined at the hip and having experience doing both is fundamental to being a good investor. There are many successful investors who have never run a business before. My hat's off to them. - For me, without the business experiences as a teenager and the experience running TransTech, I think I'd have been a below average investor. I don't fully understand how they do it.
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.
Pabrai: Future performance of Pabrai Funds is a function of future investments. I have no idea what these future investment ideas would be and thus one has to be cognizant of this reality. It would be foolhardy to set expectations based on the past. We do need to set some benchmarks and goals to be measured against. If a fund beats the Dow, S&P and Nasdaq by a small percentage over the long-haul they are likely to be in the very top echelons of money managers. So, while they may appear modest relative to the past, they are not easy goals for active managers to achieve.
The goals are independent of market conditions today versus the past. While circle of competence and knowledge does (hopefully) grow over time, it is hard to quantify that benefit in the context of our performance goals.
Pabrai: I started with studying Buffett. Then I added Munger, Templeton, Ruane, Whitman, Cates/Hawkins, Berkowitz etc. Best to study the philosophy of the various master value investors and their various specific investments. Then apply that approach with your own money and investment ideas and go from there.
Mr. Pabrai has been a managing partner at Pabrai Investment Funds since its inception in 1999. Prior to the fund, Mohnish worked for Tellabs, a telecom company, and later founded TransTech, Inc., an IT consulting company.
- The Dhandho Investor by Mohnish Pabrai
- Mosaic: Perspectives on Investing by Mohnish Pabrai
- Buffett Succeeds at Nothing by Mohnish Pabrai
- Articles about Pabrai with Guru Focus and Forbes
- Pabrai's Interviews with Motley Fool, Bloomberg Part 1 (Part 2), and CNBC
- The Dakshana Foundation
- Principles of Investing by InvestorGuide staff writers
- The Warren Buffett Quality Stock Strategy by InvestorGuide staff writers
- Common Stock Strategies by InvestorGuide staff writers