Finding Value With Mohnish Pabrai

Recently, Chairman & CIO of Ironhold Capital Management Siddharth Singhai spoke with legendary value investor Mohnish Pabrai. Pabrai is the managing partner of the Pabrai Investment Funds. The funds invest in public equities utilizing the “Munger/Buffett Focused Value" investing approach. Since inception, the fund has outperformed market indices and most investment managers. For context, a $100,000 investment in Pabrai Funds at inception in 1999 would be worth over $1.2 million as of 2019.

Intrinsic Value And Projecting Cash Flows 

The interview began with Pabrai discussing how oftentimes investors run into trouble when trying to project future cash flows. Pabrai explains how he goes about meeting such projections and how intrinsic value plays into it. He went on to state that calculating intrinsic value can be very difficult and that even insiders who have been in a given business for a long time often struggle to project their own future cash flows at times. Pabrai says however that there are ways to avoid this. He explains that it is alright to not need the exact intrinsic value but rather just a general sense of it. He says that some rules of thumb when dealing with intrinsic value is that if you cannot simply calculate it in your head there is often a problem. Pabrai then goes on to say that all businesses have temporary hiccups and those moments are perfect opportunities to enter at a good price. 

Screening For Investments 

Next, Singhai asked Pabrai to speak about how he screens for good ideas amongst growing competition from an increasing number of hedge funds and investment funds in the US. He states that he doesn’t try to be too desperate when finding new ideas and generally waits for something to come to him that is a “no-brainer”. Within the first eight months of 2022, Pabrai said he found just one investment idea which was a great idea and that it is very normal to have a year with no new investment ideas at all.

 One main rule he keeps when doing investment research is that he tends to only buy businesses that have a write-up on the value investors club. He states that it is a well-developed community which is very difficult to become a member of given its high standards. As a result, the write-ups done on the site are often credible and are a great place to start figuring out what businesses would be good to further look into. Pabrai also states that there are many great publications that can be a great basis for investment research. However, it is just up to the investor to spend the adequate time and effort needed to explore them and find the good ideas within.

 From here, Singhai asked Pabrai how he goes about attacking investments and if it is done one at a time or simultaneously. Pabrai responds that he does a little bit of both in that, at the time of the interview, the majority of his manpower was being focused on just one business. However, on the side, he does his own reading of potential new ideas and employs assistants to help him with that work as well. Regarding his own research, he tries to narrow it down to just two options and then gets help on which of the two would be worth more of his time. 

Additionally, Pabrai goes on to explain whether he believes in having another intelligent investor as a partner and how he avoids combination bias and groupthink. Pabrai mentions how Charlie Munger told him it is important to have someone to talk to about his investments. In incorporating this, Pabrai made a deliberate attempt to seek out other opinions from credible investors. He said that mathematically if he were to make six bets in three years, at least two out of those six will be wrong. Pabrai said this is simply part of the journey as an investor. He mentions that anything an investor can do to bring the error rate down for investments is worth it and speaking to a non-biased source about what you are investing in can definitely help. 

Understanding Businesses Value And Moats

Next, Pabrai speaks about how he approaches businesses that have moats. He states that the moat will be apparent once you look at the business and then analyze the numbers. He gives an example of Starbucks and how before even looking at their numbers he knows that they have a great business model. Any time they open a store in the US they generate their money back within two years. He explains how understanding what encompasses a great business is not difficult, however knowing whether or not it is a great investment is much more difficult and challenging. 

Singhai followed up asking Pabrai whether or not he believes in meeting with the management team of his investments. Pabrai states how Ben Graham famously opposed meeting management teams and that one of the dangers of actually choosing to meet with them is that the person at the top is usually a salesman who is simply trying to sell you. This he believes oftentimes ultimately distorts the investor’s analysis of the business. He mentions that looking at the businesses’ track record is a much better option. Usually, management tends to be optimists which again is another distortion of reality. 

From there, Pabrai speaks about what resources he found to be the most helpful as an investor after several years in the industry. He says that Poor Charlie's Almanac is very helpful as well as a book called “100 to 1 Stock Market” which he says is a very well-written work that helps to set up good frameworks for investing. Additionally, Pabrai states that he listens to all the old Berkshire meetings as early as the 1990s in order to help him learn and gain more insight and knowledge. All of which Pabrai said the everyday retail investor can easily access as well. 

Charitable Initiatives 

Singhai then asks about Pabrai’s non-profit and charitable initiatives. Around 15 years ago, Pabrai started the Dakshana Foundation because he realized it would be a better use of his earnings in order to devote to a real and meaningful cause. Upon thinking about where to devote this money, Pabrai realized that although almost all charities are run by people with good intentions, not all of them have the correct mindset of how to run it. He mentions that charities have to be good at capital allocation and many of them do not have the correct methods on how to do so properly. His foundation currently identifies poor kids who are very gifted between the ages of 16 and 18 in India and then prepares them to apply and get into the top colleges in India. The foundation covers the tuition costs and does a great job in preparing them for the entrance exams into these universities. 

Those interested in learning more can find the rest of the interview here.

By:

Paul Gray; Ironhold Capital CEO & NY Regional Director of the Hedge Fund Association 

Rahul Shah; Ironhold Capital Analyst