Mohnish Pabrai: Think Differently to Achieve Different Results

Posted on Posted in Mohnish Pabrai, Portfolio Management, Superinvestors, Think Differently

I recently came across two videos with Mohnish Pabrai. Readers here know that Mohnish is one of my favorite investors to listen to. He is extremely generous with his time, and he has a genuinely interested attitude toward his audience. You can tell that he truly enjoys teaching others about his investment experiences.

Pabrai has given numerous lectures over the past year, and I wrote a summary of one that I thought was particularly interesting here.

In that post, I summarized Pabrai’s results, which I thought are good enough to repost here:

Pabrai Results:

  • 1995-1999: 43.4% annualized
  • 1999-2007: 37.2% annualized (he started Pabrai Funds in 1999 and this is before his fees)
  • 2007-2009: -41.7% annualized 
  • 2009-2013: 32.7% annualized

Basically, Pabrai is interested in playing a “30 year game” as he calls it, which he is now 18 or 19 years into. So far, so good: He’s averaged roughly 26% annually since he began his investment journey in the mid 90’s. Unsurprisingly, he was inspired by the results of Buffett up to that point:

Buffett Results:

  • 1950-1956: 43.0% annualized
  • 1957-1964: 27.7% annualized
  • 1965-1993: 29.1% annualized

After seeing Buffett’s results, he began thinking the same thing that countless of other investors have thought: “maybe I too can achieve such investment success”. This statement could be thought of as unrealistic as it is naive, but incredibly, after nearly two thirds of his “30-year game”, Pabrai has indeed achieved a very similar result in terms of compounded annual returns.

Pabrai runs a concentrated portfolio. He only owns 7 stocks currently, and the majority of his assets are in Horsehead Holdings, General Motors Warrants, Bank of America, Chesapeake Energy, and Citigroup. He has mentioned at recent annual meetings that he is also willing to hold sizable cash positions temporarily while waiting for the right investment opportunity.

Probably the most important thing I’ve ever taken away from Pabrai’s lectures is the following advice that he often gives… He says that in order to significantly beat the market, or to achieve significant results of 20-30% annual returns, you have to do two things:

  1. Don’t try to beat the market (go for absolute returns as opposed to focusing on what the indices are doing)
  2. Don’t buy any stock unless you feel it has the potential to be worth 2-3x in 2-3 years

I agree with both of these points, and I also think Buffett used similar type logic in his early partnership days and even before that, when he averaged 50% per year for a few years. I once posted a blog where I made the comment that Buffett wasn’t trying to beat the Dow in the 1950’s, he was trying to make money. That’s it. He was looking for really, just blatantly obvious undervalued stocks. He didn’t care about the Dow. He did begin using it as a yard stick in the partnership days, but I don’t think he even cared about it then either. I think he was simply out to locate really mispriced undervalued businesses with the objective of making money.

I think there are subtle differences in the way you think about this that can mean big variations in long term results.

The second point is also an excellent one. I sometimes alter the 2-3 years to an indefinite time period, as I’m willing to own stocks for longer periods, but the concept is the same. You need to find huge gaps between price and value. I read write-ups all the time on Seeking Alpha and elsewhere where there is 24% upside, or 35% upside, or even 60% upside. Furthermore, these same write-ups often say things like “plus it has a margin of safety”. To me, if a stock has 35% upside, it doesn’t have much of a margin of safety. I equate the gap between price and value with the margin of safety.  Of course, if that amount of upside is accurate, it’s not a bad result. But the problem is that if one thing goes wrong, then the upside disappears in a hurry, threatening your principal.

It’s hard to find 50 cent dollars, and that’s why Pabrai is extremely patient, waiting and waiting for the right opportunity. This unwillingness to invest in moderately undervalued ideas is one reason why he has been able to achieve such excellent long term results. His patience and his ability to wait for the right opportunity is likely one of the main competitive advantages he has as an investor.

Enjoy the videos…

22 thoughts on “Mohnish Pabrai: Think Differently to Achieve Different Results

  1. hey i enjoy your articles a lot, keep up the good work ! i wanted to know how in this article you linked to mohnish pabrais fund throught SEC website. I type in pabrai funds and i dont get the same result. What do i type in to get his funds holdings ?

    thankyou

  2. If you’re going to make a statement as audacious as Pabrai tracking Buffett’s returns, please do the math. I don’t give any investor credit for returns that aren’t part of a fund (Mr. Buffett was investing money for 15+ years before he started his first partnership, and he never asks someone to give him credit for those years). So I’ll start Pabrai’s returns from 1999 onward…

    1999-2007: 37.2% annualized (he started Pabrai Funds in 1999 and this is before his fees)
    2007-2009: -41.7% annualized
    2009-2013: 32.7% annualized

    …that’s 8 years of compounding at 27.75% net (Pabrai charges 0 management and 25% incentive fees, last I checked, and investors don’t eat gross returns), followed by 2 years of -41.7% net each year, followed by 4 years of compounding at 32.7%.

    That works out to 5.797 times your money over 14 years, or a net return of 13.375%.

    So halfway through his “30 year game” Pabrai is hardly looking like Mr. Buffett. In fact, to compound at 20% net over the “30 year game” he will need to deliver 26% net returns and therefore ~35% gross returns for the next 16 years. I wish him luck, but I think it’s going to be hard.

    Also, one final point that’s important to note. If you deliver 8 years of terrific returns on a small capital base, and keep raising more capital so that you’re over $1bn of capital under management right before you have two years of -41% returns, you’ve actually lost more money, in aggregate, than you ever made.

    So compounded returns might tell you one story, but I think it’s equally important to track how much profit, in aggregate you’ve made your investors compared to how much they gave you. Besides just the compounded return number, that’s what makes Mr. Buffett, Soros, and a handful of others truly great investors, in my opinion.

    1. Hi Skepti cal, Yeah you raise some fair points… but basically, I’m not trying to figure out what an LP would have achieved by investing with Buffett or Pabrai… I’m only interested in the results they achieved from their investment strategy. And gross returns is the easiest way to compare apples to apples. Secondly, Buffett’s returns are gross returns, so you’d have to make the same adjustments to be fair. Third, I don’t know why you wouldn’t want to use Pabrai’s early investment results.

      Again, I’m not trying to present a case for investing as an LP. If that’s the case, maybe you’d only want to use his audited fund results. But there is no reason you can’t draw some broad conclusions from his previous results–unless of course you don’t believe that they are accurate.

      I think you can slice and dice them any different way and come up with different results, but the CAGR from 1995 to 2013 is roughly 25.7%, and pretty solid. Again, these are gross of fees, but my point was to try and portray the merits of his investment strategy, not the merits of investing as an LP in his fund.

      And last thing: your point about the aggregate amount of money is also valid. But here again, I’m not really interested in comparing money weighted returns for the same reason… the idea is to try and compare his results, and the best way I think to do that is to compare CAGRs. But yes, you are absolutely right: Buffett and Soros have extracted more absolute value (in terms of aggregate dollars) than Pabrai… but that’s like saying Fidelity Investments is better than Buffett because Fidelity has collectively made their clients more money than Buffett. After all, with $2 trillion of AUM, a simple 10% return creates $200 billion in just one year, and $400 billion in two years, more than the market cap of Berkshire.

      Anyhow, some counterpoints to your argument. However, I think we can both agree that Buffett is the better investor. But I also think Pabrai should be given his due. There are very few investors who have achieved the record he has since 1995 (you could probably count them on two hands).

      Thanks for the comment. Interesting…

      1. Hi John,
        I guess we can agree to disagree. Maybe I’m taking too naive a view, but if you’re managing other people’s money, the only return that matters is a net return. Gross returns just mislead people who don’t know how to interpret them – especially when you charge no management fee and a 25% incentive.

        Buffett/Berkshire’s returns are net in my opinion – if you own BRK, you’re paying “management fees” (Ted, Todd, Tracy and everyone else gets paid before you see any addition to book value) and indirect incentive fees (employees do get paid bonuses that are linked to performance). When you sell BRK (assuming the multiple of book value hasn’t changed) the return you made on that stock is equal to the compounded growth in book value.

        So if you wanted to compare gross returns you’d have to add back Berkshire’s salaries and incentive fees (and probably even their capital gains taxes over all the years).

        Yes, you’re right that Fidelity isn’t better than Buffett or Soros because they’ve generated more cumulative dollars of profit. But my point was a bit different – if someone has generated a minuscule (or negative) aggregate profit (relative to the size of dollars they managed at peak), it certainly provides some qualitative information beyond a net/gross return CAGR. If investing is about being a good steward of capital, then it’s hard to overlook this little detail.

        While I’m here, let me also say I really enjoy reading your blog. Your articles are very interesting and informative, so thank you for sharing it with the world! And thanks for taking the time to reply to every comment!

        1. Thanks Skepti cal… and yes, I would consider Berkshire (BRK) returns as net. The partnership numbers are gross (or most people report his 33% annual returns which are gross during those years). But you’re right, it just depends on the point of reference that you’re viewing these returns. If you are interested to compare the results you would achieve as an investor alongside these managers (as a shareholder of BRK or an LP in Pabrai’s funds), then net returns are what you must use to get a good apples to apples comparison.

          If you are trying to judge the merits of the actual investment skill, then I would just look at the gross returns.

          And it’s a great point regarding the miniscule “management fee” that Buffett, Weschler, Combs, etc… charge BRK shareholders. On a $309 billion company, Buffett takes a 6 figure salary and even when you add Combs/Weschler it’s far less than one tenth of one percent. What a bargain for shareholders!

          Thanks for the comments, and thanks for reading!

          1. Hi, I’d like to join in on this point. How can you verify Pabrai’s results from 1995-1999? Are they audited, did he publish brokerage statements or tax returns? Or did you just take his word for it. In research, about facts such as this, one should cite sources, if not it shouldn’t even be worth mentioning.

            Yes, I often hear people write about Pabrai’s results in a similar way to Bill Miller. The bottom line is he was horribily blindsided in 2007-2009. Many people did not see it coming, but many also did and are thriving. Frankly, his performance seems to be average at best when you consider the fact that his early Fund results were managing so little money. He seems to be a bull market baby. I wouldn’t trust him with my money, but I think he is great at getting press and attention, more than he deserves.

          2. Hi Bovinebear, yeah I just took Pabrai’s word for it. I assume he’s not lying when he publicly states that he made those returns. I have no reason to believe that the results he states are not truthful.

            If you don’t believe him, you can use his audited returns from his fund, which although they’re not as good as the 95-99 results, they still trounce the S&P. I don’t see how you can say he’s a “bull market baby” when he started his fund in 1999 and has sucessfully produced somewhere around 15% annual returns in a market that included 2 50% plus declines in the S&P!

            When he started his fund, the S&P was around 1500. It’s now only 30% higher, after 15 years, and for most of that 15 year period was below where it was when Pabrai started (an index investor in 1999 would have been underwater for over a decade). That doesn’t seem like a bull market to me.

            I can understand your unwillingness to take his word for his 95-99 results (although I’m confident Mohnish’s results are what he said they were), but I can’t understand how you can consider his investment results average.

            Just my thoughts.

          3. Hi John Huber,

            this is in reply to your response to mine (I couldn’t find a reply button on that message).

            Thanks for responding. I do admit my words “bull market baby” may offend. I read it somewhere else, and it refers to the fact that his results outpace the general market in a bull cycle, but also lags during a bear. That is something no investor wants. But that’s what happens to the hundreds of millions of new dollars coming in to his funds in the mid 2000’s.

            This is the opposite of Buffett who always said about this partnership that he doesn’t focus of beating the market during a bull but on beating the market during a bear.

            But thanks for your blog, I find the articles informative.

            BTW do you know PF3’s 2013 results?

          4. Thanks Bovinebear. Appreciate you reading. I don’t know the 2013 numbers for Pabrai. Thanks!

    2. Hi skepti cal,
      I want to point out few things which I read somewhere and I assume they are right.I may be wrong,so, skepti cal and John, please correct me if I am.
      1. Pabrai’s fees isn’t 25% of gross,but its 25% of the returns exceeding 6% i.e he will not charge for an investment return up to 6%.If you take this into account his 1999-2007 net would be 29.4% instead of your 27.75% and the 14 year figure would be more impressive than 13.375 as you calculated .
      2. I totally disagree with your point that Buffett had been investing for 15+ years prior to the commencement of Buffett Partnersip Limted,and it isn’t included in analyzing his overall return.I agree that his investment career started since age 11 (BPL started when he was 26).But he wasn’t a professional stock investor delivering good returns worth enough to be added to his legendary journey since the inception of BPL. At 11 he bought 6 shares of Cities Service Preferred.And after few months sold them hardly making big profits(around 4%).There is no further details of any stock investments in his teenage.He,out of passion was involved in many small businesses that helped him to earn a huge amount of money when he finished schooling(a great portion of that money was made out of activities like delivering news papers,installing ping pong machines etc.) but it wasn’t out of stock market.He first read “Intelligent Investor” and thus came to know about Ben Graham( and probably fascinated by value investing for the first time )when was aged 19 .So we can’t track any stock investment returns 15+ years prior to BPL.Taking this into account and allowing 95-99 period to be added to Pabrai’s career,total returns would be amazing.
      3.Regarding net vs gross,both of you are right from different perspectives.Since we are discussing about Mohnish’s investment savvy, gross profit is more relevant here.(I don’t know whether Buffett’s results are gross or net).
      4.” If you deliver 8 years of terrific returns on a small capital base, and keep raising more capital so that you’re over $1 bn of capital under management right before you have two years of -41% returns, you’ve actually lost more money, in aggregate, than you ever made.” -This doesn’t makes sense.Even Buffett had a bad time during 08-09 period(not really bad, as they know that these kind of vicissitudes are unavoidable when you are looking for the long term),and if you put the same test for Buffett (a hypothetical situation in which Berksire’s AUM get suddenly multiplied by a huge factor months before 08 crash)you are going to get same results. Isn’t?It doesn’t make any sense at all.

  3. Hi John,

    Nice article. I did want to point out that Mohnish also has a 10% position in Fiat who owns Chrysler. It is not shown on Gurufocus because it is not a US stock. I went to his CA annual meeting last year and got the perspectucs. He also discussed the heavy automotive investments. I also want to brag that I am the guy who gave him the T-shirt as a gift that he wears in the second video. Although he points out I misunderstood his ComLB as compound like Buffett and not com-(pound) the LB being the symbol for pound. But I am still happpy he actually wore it.

    Thanks again for the article.

    Best regards,

    Jeff

  4. Hi John,

    You might also be interested in Howard Marks’ memo “Dare to Be Great” and “Dare to Be Great II” if you have not already read them.

    Chris

  5. John Campbell, I’d be interested to hear Mohnish’s thoughts on the auto investments and if he compared Fiat to his GM warrants investment. I’ve heard him talk about the GM investment some, but not as much on Fiat.

    He at one time was invested in BYD, did he talk about that?
    Also, I would think he’d be interested in Korean prefs, seems like a Mohnish-type investment.

    Lots of Qs there, sorry and thanks!

    1. Hi Steven,

      Mohnish did talk a little about his auto investments. Someone asked if he thought Ford was a good investment too and why he didn’t invest in them? He answered that he thinks Ford is a great company and will probably do very well over the next 5 years.

      He said the auto industry as a whole has great tailwinds because of all the pent up demand from the last 5 years since the great recession where auto sales have been way below average. Eventually cars wear out and must be replace. Many people waited instead of 8 years to turn them in to 12 or 13 years but eventually it must be done. He expects car sales in the USA to go way up in the next 3-4 years and the big 3 players Ford GM and Chrysler (Fiat) to all do really well.

      But he likes GM and Fiat better because they have the advantages of reorganization that Ford doesn’t have. Since Ford didn’t declare bankruptcy in 2008-2009 like the other two, it has major debt and pension obligations. Since the others got rid of these obligations through the restructuring, moving forward that gives them a major competitive advantage that could last a long time.
      If Ford has to pay $1500 per vehicle sold to pay pensions for people who are no longer working and GM does not. Then in theory, GM could sell the same vehicle for $1000 less and still make $500 more than Ford for the business owners.

      This creates a low cost provider advantage that could last the next 20 plus years for the reorganized companies. Being able to provide the same good for less and still make more consistently for years is like the GEICO advantage over companies with agent expenses.
      It is a real advantage and the only way for Ford to level the playing field is to go bankrupt which is unlikely now that the economy has improved and the pent up demand is starting to unleash.
      Once the car companies move past all these recalls and bad news, the expectation is that they do great in the next 3-4 years.

      Hope that helps.

      Best regards,

      Jeff Campbell

  6. It will be interesting to see what kind of returns Pabrai’s new venture, Dhandho Holdings, can achieve in the years ahead. I know he purchased Stonetrust Insurance earlier in the year and plans on doing an IPO for Dhandho sometime in 2015. It seems that Pabrai is taking the Buffett cloning idea all the way by trying to create a mini-Berkshire; does anybody have any insightful information on this new venture?

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