Mohnish Pabrai's Recommended Reading List

Investor Mohnish Pabrai recently recommended a few books at his talk at Google which we just highlighted.


Mohnish Pabrai's Recommended Reading List

  Am I Being Too Subtle? by Sam Zell.  Pabrai said it was great and personally preferred to listen to the audiobook.


  Damn Right: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger by Janet Lowe. The other biography on Charlie Munger that Pabrai said included interesting tidbits not seen before.


  The Beak of the Finch: A Story of Evolution in Our Time by Jonathan Weiner.  Mohnish said he was fascinated by it.  "Unrelated to investing but a great read."


And in the past, Pabrai has also frequently recommended books such as:

  Poor Charlie's Almanack by Charlie Munger.  The classic text that any follower of his should read.


  The Essays of Warren Buffett by Warren Buffett.  Another classic.


And while he didn't recommend his own book, it's worth noting Pabrai has authored The Dhando Investor: The Low-Risk Value Method to High Returns.


For more book recommendations from top investors check out the right sidebar of Market Folly as we've posted many lists.

Mohnish Pabrai's Talk at Google on Entrenched Biases

Fund manager Mohnish Pabrai recently gave a talk at Google on how intensive stock research can be injurious to financial health. 

The video's description is "how the plethora of deeply entrenched biases and flawed evolutionary brain wiring makes us prone to make plenty of mistakes when picking stocks.  Specifically, the more time we spend analyzing a given business, the more likely we are to like it and invest in it. 

But if we don't spend time studying a business, how are we expected to understand its prospects and likely future?  This strong commitment bias is an important reason why most investment managers have trouble beating the index. 

Mohnish will lay out the origins of this bias problem and a few hacks to get around it."

Embedded below is the video of Mohnish Pabrai's latest talk at Google:



For more from this investor, we've posted Pabrai's talk on value investing as well.

For other investor talks at Google, we've posted many of those presentations and you can scroll through that link.

Mohnish Pabrai's Presentation at Boston College on Value Investing

Value investor Mohnish Pabrai of Pabrai Investment Funds recently spoke at Boston College on the topic of value investing.  He visited Professor Arvind Navaratnam's class on Applied Fundamental Analysis & Behavioral Value Investing.

In it, he addresses valuing businesses, talks about a bank in India, answers questions and more.

Embedded below is the video of Mohnish Pabrai's presentation:



For more from this investor, head to our post on Mohnish Pabrai on checklist investing: learning from mistakes.

Mohnish Pabrai on Checklist Investing: Learning From Mistakes

Value investor Mohnish Pabrai sat down for an interview with The Motley Fool to talk about his approach and how he uses checklists in his investment process.


Checklist Investing & Learning From Mistakes


Pabrai had an epiphany after learning from concepts discussed in Atul Gawande's book The Checklist Manifesto.  Essentially, he tries to learn from his mistakes by figuring out what went wrong with certain investments and how he could have prevented losses/a specific outcome.

But he also looked at some of the best investors in the world and incorporated their mistakes as well (looking at Warren Buffett, Charlie Munger, LongLeaf Partners, Third Avenue, etc).


Pabrai's Investment Checklist

Pabrai says that, "And what was stunning to me is that in almost all cases where I could figure out the reason for the loss, it was very apparent before the investment was made, number one. And the second is the reason was very basic. It wasn't some esoteric reason that you had to do some higher math to the fifth decimal to figure out this wasn't going to work. It was very basic."

While Pabrai has never revealed his checklist, he notes that there's about 98 questions on it that examines before making an investment.  He does drop a few hints as to what he looks for though:

"So for example, we have a set of questions which relate to leverage. Debt covenants, how levered and all kinds of different issues related to leverage, because that has caused a lot of investments to go south.  We have another set which relates to moats, the lack thereof, right? And so all kinds of things. There's another set of questions which relate to things like unions and labor relations. There's another whole set of questions on management and ownership. Just all kinds of nuances of whether they own stock, do they act like owners and all those sorts of things that come up. And then there are a few miscellaneous ones."

Since applying the checklist, Pabrai feels that his investment error rate has dropped significantly.  Embedded below is the video of Pabrai's interview on checklist investing:




For more from this value investor, be sure to also check out what Pabrai learned from lunch with Charlie Munger and Warren Buffett.

Charlie Munger & Warren Buffett's Secrets To Investing Success

Value investor Mohnish Pabrai recently sat down for an interview with The Motley Fool and he talked about what he learned from his lunches with Charlie Munger and Warren Buffett.


Charlie Munger's 3 Secrets To Investment Success

Pabrai talked about how Munger revealed 3 things investors can do to be successful:

1. Carefully watch what other investors are doing
2.  "Look at the cannibals" - look at businesses buying back huge amounts of stock
3. Carefully study spin-offs

Point number one is quite interesting as Munger flat out tells you to watch other investors (i.e. 13Fs, 13G's, public appearances, etc), something Market Folly's expanded on in our premium newsletter.  Rather than blindly copying their picks, we'd assume Munger means to use this as a source of idea generation and a starting place to do more work.

The second point (stock buyback) is something that numerous hedge funds take into consideration when evaluating ideas.  Steve Mandel of Lone Pine Capital is said to be a fan of 'share count shrinkers'. 

Lastly, the third point (spin-offs) is an excellent place to source ideas and Joel Greenblatt talks about spin-offs in his book.  In fact, many hedge funds buy companies that announce a spin-off and then once the split is complete, hold onto one piece of the company that they like most. 

An example that many hedge funds played was Expedia (EXPE) spinning off TripAdvisor (TRIP).  We'd assume Charlie also meant 'split-ups' and a recent example of that would be Tyco splitting up into PentAir (PNR), Tyco (TYC), and ADT (ADT).  


Warren Buffett's Words of Wisdom

Pabrai relayed a story Warren Buffett told him about his former partner Rick Guerin, who fell off the map so to speak.  Buffett, Guerin, and Munger used to all invest together but Guerin was in a hurry to get wealthy whereas Munger and Buffett weren't.  Buffett's outlined two lessons:

1. Avoid leverage
2. Be patient

Guerin was levered with margin loans in the 1973/74 downturn and received tons of margin calls, so he was forced to sell his Berkshire Hathaway (to Buffett).

So Pabrai described the lesson from Buffett as, "if you're even a slightly above-average investor who spends less than they earn, over a lifetime you cannot help but get rich if you are patient.  And so the lesson was, don't use leverage, right?  And be patient.  These are attributes he's talked about plenty, but I would say that it got seared in pretty solidly after hearing the format in which he put it."



Embedded below is the video of Pabrai sharing what he learned:



For more from these great investors, head to Warren Buffett's recommended reading list as well as Charlie Munger on the psychology of human misjudgment.

Notes From Mohnish Pabrai's Annual Meeting

A reader sent in notes from Mohnish Pabrai's annual meeting that recently took place.  He runs Pabrai Investment Funds and tries to emulate Warren Buffett with his value approach.

Pabrai currently has around $540 million under management and detailed a post mortem on some of his past holdings, revealing his mistakes were: 1) permanent loss of capital, 2) mistakes of omission and 3) selling something to buy something else and the exited business does better.  Pabrai has seen 13.3% annualized returns since inception.


Question & Answer Session

Q: You don't use explicit leverage but you have lots of leveraged investments in the portfolio?

A: Munger says 4 stocks is diversified.  If you owned the best apartment building in town, the highest quality business, Ford dealership, and other, you will do pretty well.  Bet in financials is around 25% of fund.  Munger says you can't invest in financial services companies without understanding ethos of management.


Q: Sectors to avoid?

A: Avoid what you can't understand and he doesn't like industries with rapid change (like technology or biotech).


Q: Life's 3 most important decisions?

A: Person he married, father started and bk'ed 15 companies in 15 industries.  Father identified gap but then he was eternal optimist.  Mohnish went from engineering to marketing.  Then his father pushed him out to start an information company.  Read Buffett by Lowenstein in 1994 and a light went on.  Leverage time using investing in businesses and let other guys run the business.


Q: Other idea generation tools besides 13F filings?

A: Cloning is a powerful concept.  Reverse engineer trades.  Third Avenue, Long Leaf Partners, Leucadia, Fairfax, Manual of Ideas are all places to look.


Q: Number of portfolio positions expanded after 2008 and now back to concentrated, why?

A: His natural tendency is to be concentrated.  He was shell shocked and there were a ton of big ideas available back then.  Good ideas are now scarce so better off making a good sized bet rather than 1% or 2% positions.  He holds cash now - any money put to work in late 2008 could have been a 4x.


Q: If things are cheap, why hold so much cash?

A: Not a flood of great ideas.  If he finds more he'll put it to work.  He's looking for 4x or 5x return to get interested with muted risk.


Q: QE3 how does it change what you do?

A: Bernanke doesn't need to announce QE4... it is 500 billion per year.  Not a macro guy but fairly in favor of what Bernanke has done.  Fed good at breaking ability but better than fixing things.  Don't see inflation currently but do see signs of significant unemployment.


Q: Do you model businesses, such as discounted cashflow?

A: Entrepreneurs don't use spreadsheets.  3 or 4 factors are important to each business: just focus on those factors.  Spreadsheets give you an imprecise guess of precision.



For more on this investor, we've posted up Pabrai's thoughts on investment checklists as well as his take on how you can invest like Warren Buffett.

Mohnish Pabrai Sells Pinnacle Airlines (PNCL) Shares

Value investor Mohnish Pabrai just filed a Form 4 with the SEC regarding shares of Pinnacle Airlines (PNCL). Per the filing, Pabrai has just sold 158,464 shares on April 3rd at a price of $0.70.

After the transaction, Pabrai Investment Fund II LP now owns 777,868 shares of PNCL. At the end of 2011, all of Pabrai's entities filed owning a collective 1,985,902 shares.

Shares of Pinnacle Airlines have plunged from $5.50 in 2011 down to where they currently trade at around $0.31. The company recently filed for bankruptcy protection to help tackle its debt and costs.

We've highlighted Pabrai's activity since it's a rare glimpse at his movements. As of the end of 2011, PNCL was his smallest US equity long allocation. His largest stakes were in Wells Fargo (WFC), Berkshire Hathaway (BRK.B), Potash (POT), and Terex (TEX).

For more on this investor, head to Pabrai on his checklist on how to approach an investment.

Per Google Finance, Pinnacle Airlines "an airline holding company based in Memphis, Tennessee. It is a parent company of three wholly owned subsidiaries: Pinnacle Airlines, Inc., Colgan Air, Inc. and Mesaba Airlines. The company's operating platforms include Regional Jet Operations and Turboprop Operations."

Notes From Mohnish Pabrai's Annual Meeting

Mohnish Pabrai of Pabrai Investment Funds recently held his annual meeting and thanks to Alex Bossert we're able to get a peek as to his latest thoughts. Pabrai is a value investor and our quote of the week featured his thoughts on emulating Warren Buffett, something he strives to do. Here are some selected excerpts from the question and answer session of the annual meeting:

"What are your views on position sizing?

His allocation policy changed in 2008 to reflect slightly elevated investment risks of his investment baskets and prior mistakes. If he has 10% positions it’s very hard to recover from a mistake. He discussed his new allocation framework with Charlie Munger who disagreed at first. After Mohnish explained it further, Charlie agreed that Berkshire Hathaway has achieved success with a more diversified portfolio. Mohnish talked about basket bets. When the risk is slightly elevated he will buy a basket of companies with small weightings. For example, he said he is currently researching companies in Japan. If he ends up buying companies there, he will buy a basket of companies each with small weightings in the portfolio. He said stocks there are very cheap.

What attracts you to a business?

When he finds a company that looks interesting he starts by thinking as a skeptic. He looks for something that will prove him wrong. He looks for areas of extreme mispricing. It has to be very undervalued but he also has to be able to understand it. He thinks there may be value in Coke bottlers in Japan. The Nikkei has done nothing for 27 years.

Can you name some great companies that you’d love to own at the right price?

Ikea, In and Out Burger, Costco, the low cost mines owned by BHP and Rio Tinto. Great companies are all over the place across the world. There are great companies in India and China but and ownership issues exists over there. Pricing is also an issue. Ben Graham’s approach was to go to the store and buy what was on sale and Charlie Munger’s approach is to go to the store and wait for quality items to go on sale. He likes Charlie’s framework."


The fact that Pabrai changed his stance on position sizing is intriguing as there are essentially two different schools of thought on that front: build concentrated positions and monitor them closely, or diversify risk among smaller positions. Value investors are usually firmly planted in one camp or the other and the debate as to which one is 'right' wages on. In a sense, it's a matter of personal preference and investing style. Pabrai noticed an inefficiency with his position sizing strategy during the crisis and sought to correct it to reduce risk.

Of the companies he'd most like to buy (at the right price of course), it's intriguing that he'd be most interested in companies that are low cost providers in their industry and that could possibly be a function of the economic environment we're in. Those of you trying to get a better grasp on the amount of research he does on any given company will be interested to know that for his previous investment in Teck Cominco (TCK), he read the last 8 years worth of annual reports to understand the business as he spends a lot of time focusing on the balance sheet. Head to Alex Bossert's summary for the full meeting notes. And if you want to hear Pabrai's latest investment ideas, he'll be speaking at the Value Investing Congress (sign-up fast, only 17 seats remain).

Mohnish Pabrai on Investing Like Warren Buffett ~ Quote of the Week

Value investor Mohnish Pabrai has long emulated the ways of the legendary Warren Buffett. When he was asked about how Buffett found so much success and how to follow in his footsteps, Pabrai had this to say:

"In fact there are a couple of professors in Ohio, who studied any stock that Warren Buffett bought, if you bought on the last day of the month, when it was public that he owned that stock, and you sold it after it was public that he had started selling it, you would have generated north of 20% annual rate of return.

I would say that we will never see another Warren Buffett. Just like we will never see any Albert Einstein or another Mahatma Gandhi. Buffett is a very unique individual. His skillsets outside of investment are phenomenal but they get dwarfed by his investing skills. The main thing that makes Warren Buffett Warren Buffett is that he is a learning machine who has worked really hard for, let’s us say seventy years, and is continuously learning every day.

So the thing is if you want to be like Buffett, there is no short cut. First of all, you have to be deeply interested in investing and you have to be very willing spending tens of hours, hundreds of hours, reading the minutiae. There is a very famous value investor called Seth Klarman. He is into horse racing. And his famous horse is called Read the Footnotes."

~ Mohnish Pabrai

You can hear Mohnish and many hedge fund managers present their latest investment ideas at the Value Investing Congress on October 12th in New York City. There are only 23 seats left at the event and Market Folly readers can save $300 off admission here.

Mohnish Pabrai's Investment Fund: Latest Portfolio (13F Filing Q1 2010)

(This post is part of our series on tracking hedge fund portfolios. If you're unfamiliar with tracking investments they disclose via SEC filings, check out our series preface on hedge fund filings.)

Next up in our series is Mohnish Pabrai and his Pabrai Investment Fund. He is a value investor in the true sense of the word and has followed in the footsteps of Warren Buffett in numerous ways. Firstly, his fund is structured similarly to Buffett's Partnerships where he charges no management fee and then no incentive fee until the fund gains at least 6%. Once Pabrai clears this hurdle, he charges a 25% incentive fee. Typical hedge funds charge a 2% management fee and a 20% performance incentive. Pabrai has in the past won an auction for lunch with Warren Buffett as well.

For 2009, Pabrai's funds performed well after having a poor 2008. Last year, his PIF2 finished up 122.5%, PIF3 up 125%, and PIF4 up 118.8% as noted in our hedge fund performance numbers post. Pabrai recently presented at the Value Investing Congress and you can read in-depth notes from the event here.

The positions listed below were their long equity, note, and options holdings as of March 31st, 2010 as filed with the SEC. All holdings are common stock unless otherwise denoted:


Brand New Positions
International Coal Group (ICO)


Increased Positions
Fairfax Financial Holdings (FFH): Increased position by 0.34%
Terex (TEX): Increased by 0.02%


Reduced Positions
Teck Resources (TCK): Reduced position by 99.5%
Harvest Natural Resources (HNR): Reduced by 14.74%
Potash (POT): Reduced by 2.03%
Pinnacle Airlines (PNCL): Reduced by 0.25%
Air Transport Services Group (ATSG): Reduced by 0.24%
CapitalSource (CSE): Reduced by 0.18%
Berkshire Hathaway (BRK.B): Reduced by 0.02%


Positions They Sold Out of Completely
n/a


Pabrai's Portfolio (by percentage of assets reported on 13F filing)

1. Potash (POT): 11.89%
2. Brookfield Properties (BPO): 10.89%
3. Harvest Natural Resources (HNR): 10.80%
4. Fairfax Financial (FRFHF): 9.28%
5. Berkshire Hathaway (BRK.B): 7.81%
6. Cresud (CRESY): 7.20%
7. Leucadia National (LUK): 5.90%
8. Goldman Sachs (GS): 5.68%
9. Air Transport Group (ATSG): 5.42%
10. Horsehead Holding (ZINC): 4.83%
11. CapitalSource (CSE): 4.72%
12. Pinnacle Airlines (PNCL): 4.48%
13. Terex (TEX): 3.62%
14. Wells Fargo (WFC): 3.50%
15. International Coal Group (ICO): 3.45%
16. Interactive Brokers (IBKR): 0.46%
17. Teck Resources (TCK): 0.07%


As you can see, Pabrai favors many natural resource type plays and has held some of them for quite some time. Potash (POT) is the most notable as it is his largest position. However, he has essentially sold completely out of Teck Resources (TCK), as he only has a tiny part of his position left. Pabrai also started a brand new stake in International Coal Group (ICO). Given that he is a true value investor, you won't see as much turnover in his portfolio to begin with so that wraps up the major moves. For more on Pabrai, head to his recent insight at the Value Investing Congress.

Assets reported on the 13F filing were $332 million this quarter. Data from the SEC is aggregated and sorted automatically by Alphaclone, our source for hedge fund tracking, replicating, and performance backtesting (Market Folly readers can receive a special free 30 day trial). Remember that these filings are not representative of the hedge fund's entire base of AUM.

This post is part of our daily hedge fund portfolio tracking series. We've already detailed activity from numerous managers so click the links below to be taken to the respective portfolio updates: Seth Klarman's Baupost Group, Warren Buffett's Berkshire Hathaway, Stephen Mandel's Lone Pine Capital, and Bill Ackman's Pershing Square, David Einhorn's Greenlight Capital, Eddie Lampert's RBS Partners, and David Tepper's Appaloosa Management. Be sure to check back daily for new hedge fund updates.

Mohnish Pabrai Adds Capitalsource Equity: 13F Analysis

This post is part of our series on hedge fund portfolio tracking. If you're unfamiliar with tracking investments they disclose via SEC filings, check out our series preface on hedge fund 13F filings.

Next up in our series is Mohnish Pabrai and his Pabrai Investment Fund. Yesterday we kicked off our series by examining the portfolio of Seth Klarman's hedge fund Baupost Group and today we're focused on another value oriented fund. Pabrai's Investment Funds had a rough 2008 but rebounded well in 2009. His PIF2 finished up 122.5%, PIF3 up 125%, and PIF4 up 118.8% as noted in our 2009 hedge fund performance numbers post. In the past, we've also posted up Pabrai's third quarter investor letter where you can read his insight.

Pabrai is unique in that he has structured his fund similarly to the early Warren Buffett partnerships. Typical hedge funds charge a flat 2% management fee on assets and then a 20% performance fee incentive on top of that. Pabrai on the other hand charges no management fee and then no incentive fee until the fund reaches 6%+. After that threshold is reached, they can then charge a 25% incentive fee. So, his interests are aligned with the fund as he does not make money until investors do. Pabrai will be speaking at the upcoming Value Investing Congress along with numerous other hedge fund managers and Market Folly readers can save 33% with discount code P10MF6.

The positions listed below were their long equity, note, and options holdings as of December 31st, 2009 as filed with the SEC. Note that we are only covering the major portfolio maneuvers. All holdings are common stock unless otherwise denoted.


Brand New Positions
Capitalsource (CSE)


Increased Positions
Fairfax Financial (FRFHF): Increased by 17.2%
Cresud SACIFYA (CRESY): Increased by 5.3%
Potash (POT): Increased by 4.45%


Reduced Positions
Pinnacle Airlines (PNCL): Reduced by 4.9%
Berkshire Hathaway (BRK.B): Reduced by 1.54%
Harvest Natural Resources (HNR): Reduced by 1%


Removed Positions (Sold out completely):
Ternium (TX)


Top 15 Holdings by percentage of assets reported on 13F filing

1. Potash (POT): 11.46%
2. Teck Cominco (TCK): 10.98%
3. Harvest Natural Resources (HNR): 9.23%
4. Brookfield Properties (BPO): 8.91%
5. Fairfax Financial (FRFHF): 8.82%
6. Cresud SACIFYA (CRESY): 7.73%
7. Berkshire Hathaway (BRK.B): 6.56%
8. Leucadia National (LUK): 5.87%
9. Goldman Sachs (GS): 5.84%
10. Horsehead Holding (ZINC): 5.40%
11. Air Transport Services (ATSG): 4.44%
12. Pinnacle Airlines (PNCL): 4.31%
13. Capitalsource (CSE): 3.49%
14. Terex (TEX): 3.28%
    
15. Wells Fargo (WFC): 3.15%
    

As you can see, there's really not much turnover in Pabrai's portfolio and that is to be expected given his long-term investment timeframe and Buffett-esque value focus. The most notable activity in his portfolio would be the addition of Capitalsource (CSE) equity. As we detailed yesterday, Seth Klarman's Baupost Group is also fond of CSE.

Some other facts worth noting here: Mohnish Pabrai's top three holdings all represent natural resources and energy and represent a decent chunk of his portfolio. His investment in Harvest Natural Resources is a 16.9% stake in the company. Secondly, Pabrai's exposure to Pinnacle Airlines represents a 11.3% ownership stake in the company. However, that figure included a very small position in call options that were set to expire on January 15th, 2010 with an exercise price of $20 per share. Obviously, those options have already expired, but since this 13F filing details positions as of December 31st, 2009 we won't see what happened with those options until a future disclosure.

For more insight from Pabrai, check his investment ideas out at the upcoming Value Investing Congress with a 33% discount here (code P10MF6). Assets from the collective holdings reported to the SEC via 13F filing were $320.5 million this quarter compared to $322.9 million last quarter. Remember that these filings are not representative of the hedge fund's entire base of assets under management. Therefore, the figures above represent the percentage of their reported 13F assets, not their entire portfolio.

We'll be tracking 40+ prominent funds in our fourth quarter 2009 hedge fund portfolio tracking series. We've already covered Seth Klarman's Baupost Group so check back daily for our updates.

Mohnish Pabrai's Hedge Fund Q3 Investor Letter

Here's the latest investor letter from Mohnish Pabrai and his hedge fund Pabrai Investment Funds. Pabrai is unique in that he has structured his fund similarly to the early Warren Buffett partnerships. Typical hedge funds charge a flat 2% management fee on assets and then a 20% performance fee incentive on top of that. Pabrai on the other hand charges no management fee and then no incentive fee until the fund reaches 6%+. After that threshold is reached, they can then charge a 25% incentive fee. So, his interests are aligned with the fund as he does not make money until investors do. Not to mention, he has 'skin in the game.'

Embedded below is the investor letter with Q3 2009 results and commentary:



You can also download the .pdf here.

Mohnish Pabrai Letter to Investors (Pabrai Investment Funds)

Just wanted to post up Mohnish Pabrai's letter to his Pabrai Investment Fund investors sent out in January 2009 detailing his 2008 year-end summary.

*Update: The letter has been removed per the request of the underlying firm.