Q&A With Mohnish Pabrai From The Pabrai Investment Funds Annual Meeting [2014]

Notes from the Pabrai Investment Funds 2014 annual meeting via BitsBusiness

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Fund Facts :

Mohnish Pabrai is the principle investor and is a classic value investor in the tradition of Warren Buffett and Charlie Munger
Pabari Funds ( PF1 through 4 ) have a combined capital of $690 Million under management
Inception : 2000

Value Proposition :

No Leverage / No Margin / No Short Positions
No management fees, only performance fees. ( typical expense ratio of Pabrai funds are between 0.04% to 0.08% )
Pabrai family is the second largest investor.

Dhandho Holdings:

Founded in Q4 2013
Raised $152.4 Million
Setup as a SPAC ( Special purpose acquisition vehicle )
- Flexible vehicle – Ability to buy and hold fully owned subsidiaries for long term and portfolio of stocks
- Time limit (sunset) to invest funds raised from investors in proposed investment (Stone Trust Insurance )
Headquartered in Porte Rico – for tax benefits
First acquisition : Stone Trust Insurance
Proposed date for IPO : 2015

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Q&A with Mohnish Pabrai

(Q) Why did you invest in Chesapeake Energy and what were your reasons to exit ?

Historically based on an energy equivalent basis, crude oil and natural gas prices should have a 6 to 1 ratio. However in the recent years the price of oil typically had traded 8-12x that of natural gas due to a combination of rising domestic production from unconventional shale gas and regulation of natural gas export from U.S depressing price levels and fear premium for the global crude oil prices.

Chesapeake Energy ‘s stock price had hit a low under the leadership of Aubrey McClendon due to unsustainable expansion and spending. Aubrey ran into financial and ethical trouble and was ousted by the board of directors

Chesapeake Energy was going through a change in management with the appointment of Doug Lawler as CEO and election of Carl Icon and Lou Simpson to the board. Doug Lawler had started to bring spending discipline and focus the company on it’s core business.

My expectations and assumptions when I invested in Chesapeake Energy were :

The core business had great underlying assets
There are few shale formation in U.S and there is less possibility of discovering new shale formations
In the long run Natural Gas will do better and there is a high probability that 6:1 ratio between crude oil prices and natural gas are restored.
The U.S govt will be lobbied by European countries to allow Natural Gas exports from U.S ( Though I was not counting on that )
The new management will bring back spending discipline and profitability

Though I still believe in the long term prospects for Natural Gan and Chesapeake Energy, It did not meet all my expectations. When I found a better opportunity to invest capital, I decided to exit Chesapeake Energy.

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(Q) Why change of heart on India?

Note : This question was in relation to Mohnish’s recent investments in India, which had avoided thus far.

I had stayed away from India as most of the companies tend to be family owned and lots of them have governance issues and hence we didn’t prefer to invest in family controlled businesses.However, we found few opportunities this year, which fit our criteria. One of them is The South Indian Bank.

Why South Indian Bank –

Unlike west or U.S it’s hard to get a banking license in India
60% of the country still don’t have a bank account
Growing middle class are embracing banking and opening bank accounts
It’s not a family owned business

(Q) On re-entry into POSCO

Posco has derived its highly efficient manufacturing process for steel and iron from Nippon Steep, Japan in early 1960’s
Even though Korea has no raw material for steel, due to highly reliable and low cost sea transportation, Posco has developed a strong competitive advantage
Steel business is cyclical and almost all steel companies have losses at one time or another, however Posco has never lost money
Posco has strong support of the South Korean government.
South korean culture and work ethic is also a strong advantage

(Q) How has your process of investment selection changed over time?

Over time i have realized it’s better to be a cloner than to think of original investment ideas.
Using a checklist before making an investment keeps me safe from biases and overconfidence.

(Q) Have you changed your philosophy of portfolio allocation from diversification to concentration over time?

My approach or philosophy depends on the availability of investment opportunities. in 2008-09 there were many opportunities and one could have a diversified portfolio with less than 2-3% allocated to each investment. In the current environment it’s hard to find many opportunities and hence I have changed my allocation to be lean towards concentration.

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(Q) How do you read annual reports of tech companies like Google?

I had read the S1 document which Larry Page had written about his vision for Google. It’s important to read the management discussions in the annual reports over the years to get the big picture and understand how the management has executed on it’s vision.

Summarize your investment thesis in a single paragraph and monitor it. If you can’t do that then you can’t own the stock. Do not read the annual report blindly and read it by asking questions.

Based on your research you should be able to extrapolate the range of outcomes for a business in the future.