Saturday, February 7, 2009

"Mohnish, How Are You Feeling?"



According to Mohnish Pabrai, this is what most of his investors were asking him after he lost 60% of their money last year. For his answer, see the excerpt below from his annual letter to his investors, dated January 16th:

I did hear from a few of you in the last few weeks. While some calls and emails expressed concern over our performance numbers, the surprising thing for me was that the overwhelming majority of you were focused on asking, “Mohnish, how are you feeling?”

Well, I am actually feeling pretty good. And as Q408 unfolded, my spirits remained elevated – mainly because I remained focused on intrinsic value and was drooling over the incredible opportunity set and valuations. I was in turbo mode trying to read huge piles of 10Ks, 10Qs, annual reports, industry reports, listening to conference calls etc. – so I could pull the trigger while the prices were still incredible. And several triggers were pulled in November and December. We bought into an incredible array of assets at remarkable prices.

While it was indeed tough to watch the severe drops many of our holdings took in Q408, keeping my focus on intrinsic value, rather than fixating on the quoted market value of various positions was fundamental to staying level headed.


Pabrai isn't the only professional investor who's expressed similar sentiments when asked about his outlook recently, but I don't get this, for a couple of reasons. First, if someone asked me how I felt about the money I lost last year, "pretty good" wouldn't be my answer; "nauseous" would be -- and I just lost my own money. If I had lost 60% of the money entrusted to me by hundreds of other investors, in addition to nausea, I'd feel some remorse.

Second, it's one thing to tout the great opportunities you see in a beaten-down market, but it raises an obvious question: did you have any dry powder to take advantage of them, or have you been forced to sell your beaten-down positions to buy stocks you think are even cheaper? At least Bruce Berkowitz was candid enough to acknowledge (on a recent conference call) that that's what he's been doing, for the most part (selling cheap to buy cheaper). If that's been the case with Pabrai too (and I assume it is, considering that Pabrai has allegedly used Berkshire Hathaway stock as a "placeholder" for cash), then his zeal for current bargains ought to be tempered by some regret for not keeping more cash on hand to take advantage of them.

About the image above:

In his book The Dhando Investor: The Low Risk Value Method to High Returns, Pabrai offers the story of the end of Abhimanyu, a hero of the Hindu epic The Mahabharata, as metaphor for the difficulty of selling a stock. In an nutshell: Abhimanyu uses a technique he overheard1 from Krishna to penetrate the spiral chakravyuh battle formation of his enemies, the Kauravas. Unfortunately, he never learned how to break out of the chakravyuh, so he has no exit strategy. He fights valiantly, one against many, and kills a number of Kauravas, but ultimately gets killed. I believe the image above2, from a Geo Cities site, depicts this.


1Please see the second comment by Ravinsu for elaboration.

2Replaced as per Ravinsu.

13 comments:

ravinsu said...

Dave,

Nice post, but the picture you have shown depicts a totally different scene from the "Kurukshethra" war.( Kurushethra is the city in Haryana, India where Pandavas and Kauravas fought centuries ago). In this picture, Arjuna, the stud warrior who is so disturbed emotionally seeing the desctruction of lives including his own blood relatives on both sides of the war totally breaks down when he has to kill Bhishma, his great grand uncle.

Lord Krishna then renders him some great messages which became the epic Bhagavad Gita - basically tells him that he is just doing his duty, so get up and finish the job. When Arjuna still refuses, Krishna takes Sudarshana Chakra (His own weapon) and goes ahead to kill Bheeshma. Arjuna tries to stop him.

In the end Arjuna got the message and kicks butt by finishing off every one.

DaveinHackensack said...

Ravinsu,

Thanks for correction. I wasn't sure if that was the correct picture, because it didn't have a caption. Does this picture depict the the scene I referred to? If so, do you have a link to a larger resolution version of it? If so -- or if you have another picture depicting Abhimanyu in the chakravyuh, please link to it in these comments and I will replace the current image I'm using in this post with that one.

Thanks.

ravinsu said...

Yes, that picture looks like Abhimanyu fighting inside the chakravyuh.

Your story also need some correction. Abhimanyu actually learned how to break into the chakravyuh while he was in his mother's womb - his father Arjuna was narrating what he knew to his mother. But his mother fell asleep before Arjuna could start narrating how to come out of the chakravyuh (She must have been bored to death). So Arjuna stopped the story right there. Abhimanyu never learned the exit process.

Had his mother been less stressed out that day, Abhimanyu could have come out of the Chakravyuh successfully 18 years later :)

Saraswati (aka JK the Yavana) said...

*swoops in on vimana to fire flaming arrow*

Amazing that he doesn't question the accuracy of his own IV assessments. It's about as amazing as the number of clients whose main concern was how Monish was feeling instead of the thousands/millions of dollars he lost them. Probably neither are true.
He needs to go back and study Buffet's rules 1 and 2, IMO.

DaveinHackensack said...

Ravinsu,

Alright, I'll switch out the pics. That's the one I was going to use initially, but it was so small. Re this:

"Your story also need some correction. Abhimanyu actually learned how to break into the chakravyuh while he was in his mother's womb"

Pabrai mentions that detail in the book. For brevity I summarized that as "overheard" -- because he overheard it while he was in his mother's womb, but I'll put a footnote in the post directing readers to your comment for elaboration.

DaveinHackensack said...

JK,

The accuracy of the IV estimates is a key point. If he was buying 50 cent dimes before instead of 50 cent dollars, then how confident can he be that he's buying 20 cent dollars now? Maybe he's just buying 20 cent dimes?

The Stock Scribe said...

I thought that was a really good article (who cares about the picture being wrong!).

I too questioned some of Pabrai's methods and made the following comment late last year:

"I also feel that if Pabrai keeps loading up on distressed businesses in distressed industries, it’s only a matter of time before he makes some very serious mistakes (if he hasn’t made them already)."

It seems that has now come true.

DaveinHackensack said...

Thanks, Stock Scribe. I expressed some concerns about Pabrai's notion of risk versus uncertainty the year before. Perhaps I'll post an elaboration on that at some point.

BTW, where in Oz are you located?

Anonymous said...

The Stock Scribe lives just two blocks East of the Yellow Brick Road.

Anonymous said...

A few people have questioned his methods. I reckon Mr Stock Scribe upset a few Pabrai fans with his post!!

Sivaram Velauthapillai said...

Good find Dave.

The point that stands out for me, although you will likely disagree, is how so many value investors are making a major macro bet with their bullish inflation views. Making a macro call, as one may imagine, tends to be outside the expertise of value investors. Pabri suggests he is loading up on inflation hedges, such as commodities; others such as David Einhorn and Seth Klarman also seem to have started betting on high inflation.

On page 11, he provides his justifications and it's all macro (but then again, it's hard to justify commodity stocks without using macro.) I'm just a newbie, err amateur ;), who has an opposite view to Pabri and others. I wonder if Pabri is taking on massive risk by switching into a high inflation bet at a seemingly questionable time period (this seems similar to his questionable method in the last two years of switching into low-quality stocks when everything was rosy and no one cared about risk.)

I may turn out to be wrong; maybe the central banks and government agencies can overcome market forces and we end up with high inflation--probably for the first time in history (didn't happen in the 30's; didn't happen in 90's Japan.) But if they don't, commodities may drop further and being the low-cost producer won't be sufficient.

Sivaram Velauthapillai said...

One other thought...

Although the US goverment debt is somewhat of a concern, it really isn't an issue. Maybe bond yields will rise (although FedRes can monetize bonds) but the doom scenario seems far-fetched (unless we are talking about a trade war wtih China or something.) US$ is still the #1 safe haven currency.

The core debt problem, instead, is the consumer. The debt threat lies with the consumer balance sheet, not the US government balance sheet.

The high US government debt leans towards the high inflation case (if the govt monetizes the debt.) But the high consumer debt leans towards deflation (if the consumer cuts back, defaults, or sees permanent impairment of the assets.)

So, I think if you are looking at it from a macroeconomic point of view, the deflationary impact of consumers need to be considered.

DaveinHackensack said...

Good points, Sivaram, and ones I had planned to address in a couple of new posts. Keep an eye out for them.