Mohnish Pabrai: Volatility Is the Friend of a Long-Term Investor

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Here’s a great recent interview with Mohnish Pabrai at The Economic Times. Pabrai discusses how he finds opportunities in today's bull market, portfolio concentration, his investing checklist, cloning, and why he’s shifted his stock-picking focus from the U.S to India saying:

“One of the reasons it’s probably becoming harder is that the number of companies listed in the US have gone from more than 8,000 twenty years ago to less than 3,500. You have a shrinking pool of companies and a huge increase in analysts following them. The result is predictable where the mispricing goes down. The Indian market has a lot more volatility than the US and volatility is the friend of a longterm investor.”

Here’s an excerpt from that interview:

You have always liked to move early into stocks. But, now that few stocks are available cheap, how are you dealing with the situation?

Even in raging bull markets, you will find things being widely mispriced. For example, about 18 months ago, I had stumbled into the real estate space. I was specifically interested in Mumbai real estate. In real estate, you want to be in places where there is no land and there’s a lot of people. You want it like Manhattan or Mumbai where it is very desirable, but you can’t easily get land. In that case, we had demonetisation, RERA, GST and then also in Mumbai specifically they have redone some of the laws for society and redevelopment. The combination of all these events was that it took out maybe 80-90% of the developers. The valuations went way below liquidation value in the case of some.

You run a highly-concentrated portfolio. Rain Industries and Fiat Chrysler make up for almost 45% of your portfolio…

Out of about $700 million of Pabrai funds, $400 million is three stocks — Fiat Chrysler, Rain Industries and Sunteck. In both Rain and Sunteck, we own 10%. They were all bought at what I would call a PE of 1 or less. All of these have gone up quite a bit since we bought them. We have decent amount of cash, but we have what I would call some great businesses, which we paid up for. Those will do well but they will not do as well as the PE of 1s. What I found over a 19-20 year investing history is that these, what I call the PE of 1s, tend to show up an idea every two or three years. In the meanwhile, if we find great businesses at decent multiples, then we will go for that as well.

What is the most important factor in your checklist while picking a company?

The checklist that I created came out of looking at mistakes made by great investors. The single biggest reason why investments don’t work out for investors is leverage. The second biggest reason has to do with a misunderstanding of the comparative advantage of the moat. Then you get to management and ownership and other issues. You might get to environmental or unions and labour and that sort of things. The three really big things are — leverage, moats and management, probably in that order.

You have never shied away from accepting that there is nothing wrong with cloning stock investments…

Cloning is very good for your financial health. There are lots of smart people in the investment world and it is very much worth looking at what their highest conviction bets are. For example, Mr (Rakesh) Jhunjhunwala has this persona of a guy who sits in front of three screens, talking to people all the time and all this activity is going on. But then in his portfolio, Titan doesn’t get touched for decades. Lupin doesn’t get touched. The crown jewels don’t get played with. Cloning is a very powerful concept. Cloning also embeds in it one of the things that I found with humans which is very peculiar is humans have difficulty with cloning. Maybe it is ego.

Our largest position is Fiat Chrysler  (FCAU). I still hate the auto industry. There is high capex, unions and consumer tastes. The only reason I own Fiat Chrysler is because I was studying why two investors I admire deeply had General Motors  (GM) as their number one position. That led me to Fiat Chrysler and led me to get past my hatred for the industry. I couldn’t have invested in Rain based on the brain power given to me by God. Somebody sent me a report on Rain which was an extremely well written report. In our portfolio, 45% is just these two stocks which are coming from cloning.

What are your biggest concerns about India?

Investors should spend zero time thinking about macro anything. Just completely ignore it because it is hard enough to figure out the future of one business. In almost all cases micro will trump macro in a major way.

You are a keen follower of Warren Buffett and you play bridge with Charlie Munger. Why is it that India never interests them?

For both, there are two issues. One is it’s an issue of size. If Warren Buffett himself is making investments at this point, he really wants to look at things where he can put more than 10 or 20 billion (dollars) at a time to work. How many companies in India have a market cap of over $30 billion?

The second is they don’t do anything hostile. If these businesses that are between $30 billion market-cap and $100 billion market caps, have an interest in selling and they call Omaha, assuming it’s a business they can understand, they would look at it. In that space there are not many companies that are interested in selling or are in spaces that are likely to have interested in them.

Why doesn’t the US interest you when it comes to stock picking?

The US has always been of deep interest to me. In about almost 25 years of investing, through most of that time I probably had 80-90% in the US. That started to change about maybe five years ago. I was finding that the US is becoming harder and harder.

One of the reasons it’s probably becoming harder is that the number of companies listed in the US have gone from more than 8,000 twenty years ago to less than 3,500. You have a shrinking pool of companies and a huge increase in analysts following them.

The result is predictable where the mispricing goes down. The Indian market has a lot more volatility than the US and volatility is the friend of a longterm investor. In the last few months, people were very sad about the rout of the midcaps and small caps. I am thrilled. We are looking for things to buy that we can hold for a long time; so if we can buy them at lower prices we are definitely very interested.

You are known to have said that an afternoon nap would help fund managers come up with better investment ideas…

Usually, I take an afternoon nap on most days. It is highly recommended. The funny thing is I was visiting Warren a few years back and Guy Spier, my friend who was with me, said: Warren, Mohnish has a nap room and he asked Warren, do you have a nap room? I was surprised Warren said yes. It just works from a productivity point of view.

What are you reading these days?

I am reading a couple of books. One is a book called Financial Shenanigans. Another book that I am reading is called The Grid. It was recommended by Bill Gates.

You can read the entire interview at The Economic Times here.

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