Monday, September 12, 2011

Complete Pabrai Funds Annual Meeting Notes: September 10th 2011 in Chicago

Note: A recorder wasn't used and therefore the following is a summary of what he said rather than an exact transcript.

Prepared Comments:

$100,000 invested in June of 2000 would be $554,600 today. This is an annualized return of 17.3% since 2000 vs. 1.1% over the same period for the S&P 500.
Assets under management: $580 million

A few past ideas:

International Coal Group:

Purchased in February 2010 at $4.3
Sold April 2011 at $10.30
138% return in slightly over 1 year
Wilber Ross founded the company and sought to replicate his International Coal Group playbook. Mohnish discussed Wilbur Ross's history and why it made sense to figure out what he was doing now.
· Mohnish liked that the company was going into metallurgical coal
· Fairfax was buying
He found the investment from looking at Fairfax fillings
Reverse engineering other people’s ideas is a very powerful approach


Purchased in April 2009 at $12.21
Sold April 2011 at $37.3
206% return in 2 years
Mohnish became interested when the stock fell 90%
Thesis: 100+ NYC’s to be built over the next 100 years. Places such as China and India are expanding rapidly.
Healthy balance sheet to ride out the storm
2-3 years out sales and FCF are likely to grow significantly due to fast growth in the Asia markets
Downside protection: selling below replacement cost
Terex was a 2% basket bet
At a price of $16 Terex is interesting to look into again

London Mining:

Purchased at $1.26 in December 2008
Sold July 2011 at $6.3
360% return in two and a half years
Found this idea by looking at John Burbank’s portfolio. They owned over 13% of the company.
The company was trading for $146 million and had cash of $300 million
This idea plays into the 100 cities thesis
Low probability of loss of capital
Management was unknown
Took comfort in the fact that it was a net net and John Burbank’s ownership


Some large caps are quite cheap today
The fund has a large non US exposure. 55-60% of the portfolio has revenue/ assets outside the United States.
25% of the fund’s cash went into recent volatility. The fund was able to put meaningful capital to work. The fund still has plenty of dry powder.
10% of the portfolio has gone into Japan. This is the cheapest market in the world. Very cheap and consistently profitable. There is a wide discount to intrinsic value and Mohnish expects good returns.

Mohnish’s first ever stock tip:

Taisei Oncho (JASDAQ: 1904)
Founded in 1941
Design and manufacture AC/ plumbing equipment
$59 million market cap
Cash plus bonds minus unearned revenue minus debt is $114 million
Net Income $6.1 million
Pabrai Funds has been buying every share offered since December 2010
Pabrai Funds now owns 1.4% of Taisei at an average price of $4.28
Consistently profitable since 2006
Tangible book value of $16.78
This company is trading at ¼ of intrinsic value
30-40 similar companies in Japan

Question and Answer session:

1. Can you discuss you investments in Goldman and BYD?
He doesn’t discuss particular investments. But he did say that he got the ideas from Buffett.

2. Given Buffett’s investments in Bank Of America, what does he think of the company? Are the warrants more attractive than the common?
He will not comment if he is buying or not. But he cited a study written by a few professors that said if you buy what Buffett has bought at the end of the month that his holdings are announced. And purchased at that week’s high price, you would still do significantly better than the S&P. So Bank of America is probably a good place for investors to look.

3. Mohnish invested in Frontline in 2004. The shipping industry is very distressed right now. Is it worth looking into at this point?

Very large crude carriers (VLCC’s) have a lead time of 3-4 years between when they are ordered and when they are delivered. A large amount of orders were placed at the end of the boom. Because of the long lead times and unintelligent behavior by ship buyers (namely the Greek’s) this market is subject to huge boom and bust cycles. The smaller ships and dry bulk ships have less volatility.
Frontline had most of its ships on spot charters. Then rates collapsed. Across the industry the single hull ships were taken out of service and scrapped.
If Frontline liquidated its VLCC’s, the value of those ships only fell from $70 to $60 million. The stock priced the ships at $15 million.
He bought because the stock was really cheap but it’s a bad industry over time.

4. Why were the investments in 2008 so small?
Some were basket bets on commodities and those were 2% positions. Normal positions are 5%. 10% is the most he will put into a company. The Japan basket bet is currently 10% and could reach up to 20% of the portfolio.

5. How do you value Potash?
He won’t discuss current holdings.

6. When making investments in commodity companies, how do you handicap for the risk of more supply entering the market and low barriers to entry?
It’s important to know where the company is on the cost curve. They want to own the lowest cost producer. When the price of the commodity goes down, the highest priced mines will close but the lowest cost producers will continue to be profitable.

7. If a 5% investment quadruples and goes to 20% of the fund, will you trim that position?
He’s never trimmed a position. The portfolio is less concentrated now, so this is less of an issue. He will only sell if it goes above intrinsic value or he finds a better investment. He usually sells at 90% of intrinsic value.

8. How do you analyze Japanese companies when information might be difficult to get or only in Japanese?
Financial statements are always in English and that’s the first step. It’s a basket bet so he spends less time researching each company than he would for a normal position. He didn’t hire a translator because that would take too long. Japan has a very trustworthy culture. He would never do the basket approach in China, India or most other places.

9. What are some investments that have lost money in the past?
The Pabrai Funds have made mistakes. The frequency of mistakes has gone down. One mistake was Sears. Many smart people were buying. Lampert is a smart guy. But he should have realized that it was a poor business. The business continues to deteriorate over time and the company has no moat. The funds lost 60% on their investment in Sears. He added an item to his checklist to prevent this mistake in the future.

10. Why did he sell Berkshire Hathaway?
Berkshire is doing well and is likely to do better than the index over time. But he can find cheaper things to invest in.

11. Are placeholders still part of the portfolio?
He no longer uses them because they didn’t work. One of his mistakes going into the financial crisis was being fully invested. The placeholders went down a lot which hurt the portfolio. It’s a much better idea to have a cash cushion because it tempers a decline and it provides dry gun powder when stocks get cheap.

12. Why is he invested in alternative energy?
He doesn’t want to discuss his ideas so he wouldn’t answer this question.

13. How do you structure the portfolio to withstand a crisis?
The portfolio has become more diversified and he also holds a larger cash cushion.
Charlie Munger says if you can’t handle a 50% drop in your portfolio then you shouldn’t be investing because that will eventually happen.
Berkshire Hathaway has gone down 50% a few times even though it’s a great business. In a stock market decline the fund will most likely go down.
However, investments such as the one in Japan will not be correlated to the rest of the portfolio.

14. How do you deal with currency in foreign investments?
He said he has no great insight into currency and he didn’t hedge the Yen. Since he started buying Japan, the index is down 15% and the Yen is up 8%. So far his basket is profitable. He ignores the effect of currency.

15. When investing in distressed businesses, how do you distinguish between a temporary verse long term problem?
He admitted making mistakes on this in the past. This is one of the most important factors and he spends a lot of time on this question. But it comes back to finding the intrinsic value and comparing that to the stock price. Investors need to determine if the distress is justified or not. For example, London Mining was worth much more in a private transaction than the price the Pabrai funds were buying at.

16. When you interview corporate management how do you evaluate their decision making process?
Most CEO’s are very poor capital allocators. A good way to judge management is to look at what tangible book value has done over time. He doesn’t interview management or even talk to them because he doesn’t want to be convinced by their sales skills. Management is always optimistic and this could cloud his decision making process. It’s better to evaluate management on your own and look at their past decisions.

17. For commodity based businesses you look at the cost curve to determine a good investment. What metric do you use for other industries?
In a commodity business he wants to own the lowest cost producer. It’s different for each industry. In retailing he looks at gross margins. This shows how well the company is run. In banking it’s the return on assets. It depends on the industry.

18. I didn’t quite catch the whole question but it had to do with his philosophy on following great investors?
This strategy doesn’t always work. But it’s a great search strategy. He’s found it to be very effective. Mohnish follows Klarman, Burbank, Watsa etc.

19. At what point does creating a basket distance you from understanding individual companies?
He’s borrowing the idea from Ben Graham. The situation in Japan is similar to what Graham was doing in the 1940’s and 1950’s in the US. This basket won’t dominate the portfolio, it’s a temporary thing.

20. How do you manage tough times?
People lose sight of basic reality. Most people freak out when their job is lost. It’s important to focus on what’s most important in life and what makes you happy. Keep a balance between work and those things.