M. Pabria Video Lecture at Ivey School Feb. 2012

Mohnish Pabria of Pabrai Funds discusses mental models and competitive analysis.  Don’t blindly follow or worship investing “gurus” but try to use what makes sense to YOU. Even investors like Pabrai have trouble understanding competitive advantage as shown by his investments in Exide (Xide), Pinnacle Airlines, Sub-prime credit during 2008, etc. We ALL make mistakes so we should learn from everyone around us.

Pabrai says, “I am a shameless cloner.” Copy good ideas.



6 responses to “M. Pabria Video Lecture at Ivey School Feb. 2012

  1. I once did a 35 page analysis for a client on Pabrai’s investing skill. He was known as “baby Buffett.” My summary: He bought leveraged assets in a easy money environment and did very well–30% returns. Money piled in after five years, then a credit collapse and his funds were down 80% at the lows. What saved him were his patient investors. He will do a bit better than the market because he avoids or trys to avoid overpaying. You can thrive if you truly understand Austrian economics, valuation, proper principles and competitive analysis.

  2. Mohnish Pabrai seems interesting. Sharp and motivated to do good. Excellent.

    More interesting however is this teacher, Anand Kumar, who Mr. Pabrai is collaborating with to emulate his education model to get smart kids from the slums of Bihar (tough city!) into engineering school (IIT no less).

    He gets them to try out after one year of tuition. Now that is some kind of dedicated practice. Totally awesome Mr Kumar.


  3. Regarding leverage: Richard Beddard runs a blog over at Interactive Investor. He has a post which starts of “Welcome to my little sho of horrors”. http://blog.iii.co.uk/the-cheapest-six-stocks-in-may/
    In it, he describes Dr Keith Anderson’s “Naked PE” strategy. It looks like he constructs a PE over several years earnings, and chooses the very low ones. One good thing about it is that it evens out earnings spikes.

    Just how well did it do? According to Richard, since inception is did very very well. Very well, that is, until about 2007. Then it did very very badly. In a six-stock portfolio, there was a total wipe-out stock in each subsequent year. At most one stock was in positive territory. Ouch!

    It looks like there were a lot of highly leveraged companies in it. You know the score – companies going for growth, rapidly expanding, and taking on a lot of debt to do so. PEs ramp up as investors chase growth, then suddenly, WHAM, they all blow up spectacularly as consumer demand dries up and the debt burden proves too much. One of the stocks, Barratt Developments, is a housebuilder, which lost 42% at one point. Clearly, a housebuilder was going to be hard hit, and suffer a big stock market decline, in the presence of the economic shocks we experienced in 2008. Barratt’s is still with us, fortunately, as is quite well-known as a housebuilder in the UK.

    It just goes to show that some strategies can do very well, until they don’t.

    Regarding cloning, which is what Pabrai advocated … I think in the UK, it’s very difficult to come up with investing gurus. I’m generally more familiar with American ones than I am with British. Anthony Bolton is one guru, but he no longer run a British fund, so he’s out of the game. His replacement, Sanjeev Shah, has yet to demonstrate that he can fill the great man’s shoes, even after 3 years. Neil Woodford deserves the title as a legendary investor. Actually, I think his style would be quite replicable by most people, too. He primarily invests in defensive companies with good returns on capital. It would be easy to buy what he buys. You could keep the companies for a long time, too. I don’t think there’s much in the way of rocket science about his picks, either. Woodford has proven himself to be a solid stockpicker, but not a spectacular one. Far short of Greenblatt-like returns, for example. I think his understanding of the general economy, and what makes for a good stock, is quite good, though. He eskews risk, and goes for solidity.

    I would possibly rate Nigel Thomas of AXA Framlington as a top-class stockpicker, too.

    Outside of that, things are a little hazy. The problem is that the media tends to concentrate on recent success, rather than long-term success. Morningstar is, I believe, based purely on quantitative data. If you look at client advisory letters, you tend to notice ratings go up and down. But I don’t want that. I don’t want to know who did well over the relatively recent past. I want to be told about the Uk equivalents of David Einhorn, Bill Ackman, Joel Greenblatt, maybe Bruce Berkowitz. Bruce has gone down in my estimation. His all-in on banks seems more of a gamble that is coming good than a solid investment. It could be, of course, that I just don’t recognise genius when I see it.

    Also, do you think that maybe a lot of Peter Lynch’s success was due to choosing a growth strategy at a time that was particularly propitious for it?

    • Dear Mark:

      I was once asked to do a study on Pabrai. His results are exactly a function of what he does–he has bought highly leveraged–both operationally and financially–companies. When the economy was being flooded with easy credit in 2001 to 2007, he had 30% returns and in 2008/2009 down 75%. No surprise. His time-weighted returns are negative–he has lost more money than made for his clients. However since inception $1 in the beginning has outperformed. As long as he avoids overpriced stocks he will perhaps do as well as an index to slightly better, but more more than that.

      If I am buying Novartis, Coke, Stryker, I am not going to buy them 50% under value and they won’t go up in three months by 50% like Bank of America or Citibank. But if they are purchased correctly then 12 to 15% returns are possible. The problem is when those types of companies become well-owned.

      If you hold a Coke forever, you will receive the ROE over time that is why they have to be sold as well.

      I think you want someone or group that has a strategy that works and they stick with it in a disciplined fashion. So if I do buy franchise companies, if I can’t buy them with a reasonable margin of safety then cash just sits there. Buffett shut down his partnership.

      I HIGHLY recommend the book , Simple but not Easy by ? Investing is NOT rocket science but our humanness trips us up.

      • Thanks John. I had a look on Amazon: Simple but not Easy, by Richard Oldfield. There are sooo many books that I want to read.

        I would be interested in your take on Greenblatt. Genius, or lucky? I ask this, because in his book “You Can Be a Stock Market Genius”, he openly admits that he doesn’t really know what makes a great company. He’d rather take the money and run. It seems he quite likes companies with a lot of leverage, but where he feels directors can put things right. Taking advantage of market technical factors also seems a feature of what he does. So maybe he has a feel for the kind of situations that will work out. Thoughts?

        • Prof. Greeblatt would be the first to tell you that he is not a brilliant analyst, but he knows what he knows and sticks to that. But the real secret, in my opinion, is his uncanny ability to heavily weight his investments to highly skewed risk and reward opportunities.

          Remember his book, You Can Be A Stoick Market Genius and his examples with Sears and Wells Fargo. Both he loaded up on, but in very different ways.

          Wells Fargo he used options because of the either/or situation. His heavily weighting certain opportunities.

          So I may find an outstanding company doing well in a negative environment like June 2011 and if I am right then in two years I might make 20% to 30%, but with the right option strategy I could double/triple that but I won’t expose as much capital to risk, but knowing when to use a different strategy is the art. I am not saying I have it, but he does.

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