Mohnish Pabrai

Executive Summary


This podcast answers the following questions:

  • 1. Who is Haricharan Ramachandra?
  • 2. Who is the investor Mohnish Pabrai?
  • 3. Is Monish Pabrai the next Warren Buffett?
  • 4. Is Monish Pabrai creating a new Berkshire Hathaway?

Who is Hari Ramachandra?

With more than 15 years of experience in the software industry, and currently working as a Senior Engineering Manager at LinkedIn, Hari knows what it takes to be a successful leader in his field. His career in investing, on the other hand, happened almost by accident. Years ago he received a number of stock options, which initially spurred his interest in trading stocks and financial instruments. According to Hari the only good thing about his first experience with investing, was that he was fortunate enough to only have limited funds to lose! Although that might be how he started, things are a little different these days.

After Hari started to read about Warren Buffett, things quickly took a turn in the road and he started his own promising career in value investing. Inspired by Warren Buffett, Hari has started his own blog, BitsBusiness.com, which Stig and Preston highly recommended. One of the many good features of Hari’s blog is his detailed notes from annual shareholder meeting, like Pabrai Funds and Berkshire Hathaway. We highly recommend his blog for valuable investment information and educational training.

Who is the investor Mohnish Pabrai?

Have you ever wondered what kind of lunch you could get for $10,000? Perhaps you are thinking Kobe beef and caviar accompanied with the finest French wine? Well, Mohnish Pabrai took the concept of expensive lunch one step further and paid $650,100 for the most exclusive charity-lunch of its kind: a private lunch with Warren Buffett.

Mohnish Pabrei is a successful investor in his own right. Since 2000 he has crushed the market by more than 1100%! According to Pabrai, the success of his stock picks can be attributed to Warren Buffett and his sound investing principles. Here’s another interesting article by Forbes on Monish.

Is Monish Pabrai the next Warren Buffett?

Pabrai is a self-proclaimed cloner of Warren Buffett. So why should you go for the next best thing? Hari remarks that Pabrai has the advantage of having much less capital than Warren Buffett. Contrarily to Warren Buffett, he can invest in smaller companies that can yield a higher return. Based on Pabrai’s past performance, he has outperformed Buffett in the last decade. To think, Pabrai has an advantage over Buffett because he has less money to invest – oh the irony.

Another thing worth noticing about Monish Pabrai, is that he has set-up a fund that “attracts the right kind of investors and keeps money in the fund even during recessions”. Effectively what Mohnish Pabrai does is solving the main problem that most fund managers face. When stock prices are declining and become attractive to fund managers, they typically have less capital to work with, which limits their returns in the long run. Pabrai has avoided this problem by only attracting very high net-worth investors who don’t pull their money out (relative to cheap funds) of the fund during deep recessions.

Is Monish Pabrai creating a new Berkshire Hathaway?

That might very well be the case! In 2015 Mohnish Pabrai plans to go public with the Dhando Holding Company, and just like Warren Buffett has done with Berkshire Hathaway, he plans to enter the insurance business. Another similarity, is the holding company is both investing in listed and unlisted corporations.

The upcoming listing for Pabrai’s holding company, is also good news for investors that don’t have the $2,500,000, to currently invest in Pabrai Funds. With the entry of a new public company, investors might be able to access Pabrai’s investing skills with a small initial equity purchase. Stig and Preston will definitely cover Pabrai’s IPO for Dhandho Holding Company when it goes public

Books and resources mentioned in this episode

Hari’s Blog:BitsBusiness.com

Mohnish Pabrai’s Pilanthropic Fund: Dakshana Fund

Benjamin Graham’s book, Security AnalysisRead reviews of this book.

Benjamin Graham’s book, The Intelligent InvestorRead reviews of this book.

Mohnish Pabrai’s book, The Dhandho InvestorRead reviews of this book.

Mohnish Pabrai’s book, Mosaic: Perspectives on InvestingRead reviews of this book.

Thomas William Phelps’s book, 100 to 1 in the Stock MarketRead reviews of this book.

Additional Resources on Mohnish Pabrai

Interview with Steve Forbes

 

Speech at Google


Full Transcript

Today’s episode has Hari Ramachandra as special guest.

Meeting a Friend and Colleague at the Stockholders Meeting

When Preston was on his way home from the Berkshire Hathaway shareholders meeting, he bumped into a gentleman named Hari Ramachandra, an executive at LinkedIn. Preston and Hari immediately became friends after finding out common interests. They stayed in contact over email since that time.

Recently, Hari went to a shareholders meeting for an individual named Mohnish Pabrai – a follower of value investing. His investing syles are particularly the same as that of Buffett’s.

Before Pabrai became an investor, he was a businessman who started his career in IT in the early 80s. He built his own company which he sold later on to equity fund. He lost most of his funds anyway.

Around that time, when Hari was so frustrated about all what he had lost, a friend referred to him Buffett’s interviews and books. He read a book that Buffett recommended to everyone – The Intelligent Investor by Ben Graham. That’s how Hari got used to the world of value investing.

Like most investors, Hari just followed the trend – started trading, did charting, and looked for options. He lost money most of the time and he didn’t even have much money to lose then. However, he made money eventually and didn’t know how he did it.

Pabrai is a hard core value investor who got hooked with Buffett’s styles. He rented all the books he could get pulled out.

One less know fact is that he wrote a letter to Buffett offering to work for free. Buffet responded and said he that wanted an opinion on his investing decisions. Graham turned down Buffett and ended up working for him, too. It’s the same for Pabrai.

Pabrai Is an Indian

Aside from being a software engineer and investor, Pabrai is a first generating immigrant from India. His philanthropy project is an organization that educates the underprivileged in India and helps them to pass the top schools.

Pabrai has two books – Mosaic and How to Value Investing. How to Value Investing is the main philosophy of Pabrai in investing and a little known Indian community. They’re less than .02 percent of USA. He talks about how they operate, and through that story, he connected business and investing.

A real entrepreneur is a risk taker – ready to jump off a cliff. A true entrepreneur shines away from the rest. He’d do everything to reduce risk but embrace uncertainly.

Why Pabrai Instead of Buffett and Graham?

Hari is very much into Buffett and Graham. Why would someone invest on Pabrai instead of on the two?

Pabrai is a self-proclaimed donor. He admits that he has no original ideas. Also, investing in him is quite considerable because he’s not yet 86.

A book by Thomas Philips, 100 to 1 in Stock Market, describes the mistake in investing as the unwillingness to accept ideas other than their own. Hari highly recommends this book as it talks about a lot of stocks in the 60s.

Pabrai’s ugly years was when he was working in the Buffett partnership. He’s very similar on how Buffett invests, but he invested on partnerships rather than for Berkshire.

Berkshire has been so big and he’s becoming handicap. Because he is moving too much capital, he doesn’t get that much of a growth spurt over the whole size of his companies. He’s forced to invest in big companies so there will be great effects.

With Pabrai, he invests like Buffett, but invests on a smaller portfolio.

To get into action, you need an initial amount of capital. Most of the funds are enclosed to new investors today. One reason why Pabrai tries to keep the hurdle high is to attract specific type of investors. His favourite target is a successful entrepreneur who made a future in his line of business, but is not investing yet. He has a staying power and he will not panic in and out of his funds. He wants to both limit and attract.

In the annual meeting, their funds are as low are $250,000 when Pabrai started in 1999. He now has increased it.

Pabrai sometimes gets asked why he doesn’t want to start his own fund. He said he doesn’t want to be handicapped for people giving and taking the money at the wrong time with the way the market swings. Pabrai forces uneducated investors in him so he won’t force them to give and take money at the wrong time. He also has a restriction for one year. You can’t pull your funds the entire year except for emergencies.

Berkshire Hathaway has same models regarding shares. A majority of the portfolio is over $200,000 per A share. B shares are $140,000 each. That’s such a small portion of Buffett’s overall portion, and it doesn’t have a impact in the total evaluation of the business.

How Pabrai Started

When people asked how Pabrai started, he read about how Buffett structured Berkshire. He found out no one was imitating his methods for years. He’s surprised that nobody cloned Buffett’s partnership over a long period.

Why Investors Don’t Fall into Buffett’s Method

Munger answered the best in one of the annual meetings when some asked why people aren’t falling into Buffett’s method: people would die before they followed the method. It worked against a lot of the methods. It’s more psych related. Temperaments are needed more than intelligence. Patience is the key. Defining and clarifying is the process. The process should be appealing rather than the end result.

Even though they know the right way to invest, they’re not able to because they are impatient. When funds don’t show results, investors pull their funds out. To survive, they have to follow the crowd. When they go along the market, nobody complains.

People think Berkshire is a fund and not a company. What’s unique is if you’re in fund, they’re giving you the money at the wrong time. When the market is crashing, they take the money. That handicaps the managers from buying.

Pabrai took that and flipped it into his head. When people wanted to sell their company with a cheap price, the managers can buy back the shares at an extremely low price. When the market value is high, he could actually issue more shares to collect cash for these shares. He hasn’t done that, but he could. He’s basically taken advantage of that market psych so much.

Hari would not be surprised if Pabrai would somehow do that in the future. He’s protected himself with the threshold it has caused to get into his fund. It’s interesting how these men protected themselves from those types of investors.

The Cloning of Berkshire Hathaway

In investing bonds, Pabrai is actually cleaning the Berkshire model. He announced the holding company in its annual meeting. The first acquisition is an insurance company.

Pabrai is cloning Berkshire.

A lot of people don’t know this, but Berkshire’s biggest engine is GEICO – a huge insurance company. The first acquisition of Pabrai’s holding company is Stone Trust Insurance. Hari sees now that Pabrai is now going after the flow and he also thinks his plan is to acquire more subsidiaries only. Investing in public companies are creating portfolios inside the holdings. He’s essentially creating a new Berkshire.

Meetings with Pabrai have a casual atmosphere. Once in a university, there were fewer than 200 people there. Most of them are his investors in his funds and are people like Hari who follow. Since it was small crowd, Pabrai walked around before the meeting started and introduced himself.

After the meeting, he hosted the dinner for everyone. During the dinner, everyone could get one on one time with Pabrai. Of course, they talked about investing and his philosophy about life and current matters. It was a very friendly atmosphere. Berkshire’s annual meetings during the ugly 80s also had very few attendees.

The Main Take Away

According to what Pabrai says, if he goes according to his plans, the holding can be a great entry point for many investors. However, Hari would also like to caution that nobody knows yet how Pabrai will upgrade and whether he’ll be able to replicate Buffett’s performance with Berkshire or not.

The holdings is planning to go public in 2015. Pabrai will probably brighten the initial offer price per share. It’ll be an interesting structure for sure now that it has a special purpose. He has a certain time to meet before the money is pulled back out of this holding if it is not invested. He’s looking for acquisitions, and insurance companies are one of these. If it goes well, next year will be a good year of proclamation.

Best Investment Advice Received by Hari

There are so many good advices especially from Buffett and Munger whom Hari read a lot. However, the one that greatly impacted his way of thinking was from Howard Marx. From his memos in risk and returns to his investors, he said, “In life and investing, you can’t expect returns by doing what everyone else is doing.”

The quote is simple and profound, yet Hari had a hard time grasping it. Buffett has been talking about being fearful when others are greedy and being greedy when other are fearful.

Pabrai and Buffett are contrary investors.

The Horses and the Investing Trend

Ordinary investors try to follow the herd. For example, when a group of horses are running in one direction, the other horses who see their own kind will run with the group of horses even if they didn’t know what’s happening or where they are going.

We need to overcome that and it requires a lot of discipline.

Most investors follow the herd mentally because they don’t understand what they have their money in. The more the person understands what stocks, balance sheets, and income statement are and when they educate themselves, it’s easier to think of investing and making your own way.

Hari’s Blog is bidsbusiness.com. Anyone may interact with him there and he’d be so willing to answer. He has notes from the annual meetings which he posts there.

For the next episode, we have a former trader and investor in the New York Stock Exchange, Greg Graziani.

If there are anything you’re interested, we’ll have that in the notes at the investorspodcast. com.

We want to hear your voice if you have questions. Go to asktheinvestors.com and record your question. We may play it in the show and if your question gets picked, you win a prize – a signed copy of the book The Warren Buffett Áccounting Book.


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