Saturday, September 19, 2009

Mohnish Pabrai: A Super Salesman, not a Super Investor

Mohnish Pabrai is clearly savvy at self-promotion (as I noted elsewhere last year) and a consummate salesman, judging by the hundreds of millions of dollars of assets he's gathered. I think it's clear by now though that he's not a great investor. If it's not, these notes on Pabrai's 2009 Chicago investor meeting, compiled by Miguel Barbosa of Simoleon Sense may be instructive. Reading them, you'll be reminded that Pabrai used to use shares of Berkshire Hathaway as a "placeholder for cash", which made absolutely no sense; that he ignored his own advice about avoiding retailers (not to mention his alleged preference for small caps) when he invested in Sears; and that he has belatedly realized that a highly-leveraged, subprime lender (Compucredit, on which Pabrai took a 72% loss1) might not do well during a credit crunch.

A couple of years ago, I sent a copy of Pabrai's book, The Dhando Investor2, to a friend of mine who works in the Southern California office of a firm that was initially established as the family office for a Gilded Age family, and now handles the finances for other wealthy families. At the time, I figured my friend's firm might be interested in looking at Pabrai as a candidate for its stable of outside investment managers, but now I think a better role for Pabrai would be as a salesman for a wealth management firm (though perhaps one with a lower minimum asset requirement than my friend's firm).

If I were Pabrai, I would quietly approach some leading wealth management/family office firms about them absorbing Pabrai's assets under management and bringing Pabrai on to gather assets for the firm from affluent Indian Americans. Pabrai could probably add more value to his wealthy clients as an excellent salesman than as an investor.

1Pabrai also doubled down on a subprime mortgage lender, Delta Financial Corporation, after the securitization market seized up in August of 2007. He held his stake until that company went bankrupt.

2Pabrai's brief book actually contains some interesting stories about entrepreneurship (Pabrai was an IT entrepreneur before becoming a hedge fund manager), but Pabrai himself ignored some of the lessons in those stories. For example, Pabrai wrote about the ethnic Indians whose businesses were expropriated by Idi Amin, and despite this, Pabrai invested in an oil company based in Hugo Chavez's Venezuela.

4 comments:

Anonymous said...

You make it sound as if superinvestors ought to be infallible. Nobody is. Under your stringent criteria, nobody could be called a superinvestor. I will not go so far as to suggest that Pabrai could yet be dubbed a superinvestor, but your reasoning eliminates the valuable learning process all investors go through.

DaveinHackensack said...

My main issue with isn't that he's made mistakes (everyone does) but his lack of any coherent investment methodology, his tendency to repeat the same mistakes, and his apparent inability to learn from them.

Consider, for example, his explanation of why he doesn't use Berkshire as a 'placeholder for cash' anymore. In Miguel's notes, Pabrai says its because some of Berkshire's businesses are not positioned to do well in the current economy. Wrong answer. The right answer is that you shouldn't use any common stock as a placeholder for cash because it doesn't maintain a stable value like cash does.

Consider also the example of Sears. Pabrai knew the problems with investing in retailers -- in fact I posted his article about that very subject here last year -- and yet he invested in Sears anyway. Why? He gave the usual bullshit reason about it being a "collection of assets managed by a master asset allocator" but Lampert himself had dismissed talk of Sears being a "hedge fund in disguise". Pabrai seems to have invested in Sears for two reasons:

1) He got his head handed to him on a series of investments where he went solo.

2) He had the comfort of the herd investing in Sears.

Also, consider the example of Compucredit. Pabrai blames them for "predatory lending"? That's a tendentious characterization of their business, and it's besides the point anyway. The company was risky because it was a highly-leveraged, subprime lender, at the tail end of a massive credit bubble. Not because it was "predatory". Pabrai's answer there is more about his desire to be admired (similar to Buffett's), and doesn't get to the heart of the risks associated with Compucredit.

Anonymous said...

You are correct in everything you say Dave. Good analysis.

value said...

Couldn't agree more about Pabrai being a salesman than an investor.
Two specific investment reason's
-Pabrai bought Pinnacle Air which I think used to lease aircraft to airlines. That dropped like a stone in the 08-09 crash. A simple analysis using Munger's criteria for 2nd order effect shows if an airline goes bankrupt any fixed price contract is well worth only paper
-2nd is Pabrai's Investment in an agri firm called Cresud, he held it for all of 1.5 years(check Gurfocus)
Agriculture has a longer cycle than manufacturing , he should have held it at leasst 3-5 years i guess if he thought it is valuable(though I do not know why he sold it)
Ever since his million dollar lunch with Warren he has basically been dropping value tips
Given all that however I would credit him with 4 things
1)He is an honest fund manager whose fund is quite sucessful overall
2)He admits his mistakes (see his latest Forbes interview) and is generous about his learnings
3)He is anyday better than a banker selling me a CDO
4)His foundation in India seems to be doing some socially useful work