Pabrai is the manager of the Pabrai Investment Funds http://www.pabraifunds.com/
For a peak at his most recent activity, take a look here:
Current Holdings
I enjoyed Pabrai's book. Unlike many of its ilk, this book is written clearly and directly - elegantly even.
I always wondered why I encounter so many Indian hotel/motel operators on my cycling trips. Now I know.
The Patels, immigrants of Indian origin arrived four decades ago in the U.S. and gradually emerged to be prime players in the American hotel industry. Pabrai attributes their success to "Dhandho" (approaches which generate wealth), specifically, the low risk/high return approach to making business and investing decisions.
It's a story of a few pioneers setting the example and others following the model of investing in small motels (often sold at fire sale prices during recessions), minimizing costs, and above all, entering into businesses only when the risks were low and the rewards high. The book is worth the read for that alone.
Pabrai extends the Ddhandho analogy to the field of investing and through story telling, illustrates how investors can take a similar approach.
He writes at a conceptual level as as opposed to getting bogged down in a swamp of superfluous detail. (For that he provides links to other value investors with stellar records of success. I have featured one of them in an earlier edition of The Financial Passage Maker: Joel Greenblat, author of the wonderful The Little Book That Beats the Market.)
I have given a great deal of thought as to how many stocks I should have in my equities portfolios. One the one hand, conventional wisdom dictates that one should have a well-diversified portfolio in order to minimize risk. On the other hand, a overly large portfolio (as seen in a great many mutual funds) starts to approach market indexing with the disadvantage of higher frictional costs.
Like Buffet and a few other successful managers, Pabrai restricts the number of holdings in his portfolio in order to maximize returns (this as opposed to realizing small gains overall based on the stellar performance of holdings which constitute a small portion of a large portfolio). There are two aspects to this:
A. Initial Selection
Pabrai devotes most of his attention to the process of selecting potential investments. Here are some rules-of-thumb:
- invest in existing businesses as they are more knowable than new ventures
- invest in simple businesses which are understandable
- buy business in sectors with a slow rate of change
- buy distressed businesses in distressed sectors
- buy businesses with a durable competitive advantage
- focus on arbitrage (a variant of the preceding bullet)
- buy businesses at big discounts to their intrinsic value
- be a copycat (see what other value investors are doing)
B. Sizing a Position
I have always wondered about this question: whether to "go big" or limit the size of my stake in a company. With the exception of a few investments in new ventures, I have come to the view that it makes sense to commit a significant amount to new investments - at least 5 and preferably,10 percent. There are two provisos to this:
a) that I have done my homework well in the initial selection process and have waited for what Herr Buffet calls the "fat pitch". This wait may take months/years. I will wait until conditions are favourable for the investment and try my best to ensure that there is a significant element of safety. Pabrai looks for scenarios with the following byline:
"Heads, I win; tails, I don't lose much!"
The Kelly Formula
Successful gamblers recognize that their success is based on two things: the ability to wager on an objective assessment of the odds; and, the maximizing of returns by optimizing betting patterns. There is a body of mathematical theory which provides one window on optimal betting strategies - the Kelly Formula. I will not get into the details here as it is somewhat complex. You can find the details here:
Pabrai is interested in maximizing the returns on wining investments and to that end, he limits the number of holdings in his portfolio. He is careful to exercise due diligence in his selection and establishes a substantial stake in order to maximize returns on successful investments. To keep things simple, he generally allocates 10 percent to any single holding.
Of course, this approach also leaves one open for large losses in the event that an investment goes south. Pabrai tries to minimize losses by looking for investments with a wide margin of safety and by holding investments for about three years. This holding period reduces the temptation to exit positions before things start to "turn around". It is often the case with investing in depressed or out-of-favour businesses that prices drop before the market starts to recognize the intrinsic value of the businesses.
My Take
Pabrai's book is a nice supplement to some notable books on value investing. I have altered by checklist for evaluating potential and existing investments. In a future post, I will present my checklist.
In recent weeks, I reviewed my portfolios. I now have a substantial cash position (more than 30 percent) and will wait patiently for the "fat pitch".
The other advantage of limiting the number of holdings in a portfolio is that it is easier to monitor the progress of one's holdings - also to monitor developments in the sector which may affect the performance of a holding.
The performance of some value funds has lagged the market in recent years; however, I have the sense that a correction will take place soon and that it will create conditions amenable to the value approach. To my mind, negative real rates of interest have "forced" people to seek out yield and to accept a higher degree of risk. For many, the increased focus on equities and dividend stocks may end badly, especially if companies lack strong balance sheets and a "wide moat".
Some Useful Sites for Value Investing
This is a very clean site which provides information about the activities of top value investors. To my mind, it is one of the best of breed: very easy to use, beautifully presented with profiles of investors which include: portfolio holdings, recent trading activity, news releases, annual reports etc. It's all here: my go-to site.
Guru Focus
Pabrai's book is a nice supplement to some notable books on value investing. I have altered by checklist for evaluating potential and existing investments. In a future post, I will present my checklist.
In recent weeks, I reviewed my portfolios. I now have a substantial cash position (more than 30 percent) and will wait patiently for the "fat pitch".
The other advantage of limiting the number of holdings in a portfolio is that it is easier to monitor the progress of one's holdings - also to monitor developments in the sector which may affect the performance of a holding.
The performance of some value funds has lagged the market in recent years; however, I have the sense that a correction will take place soon and that it will create conditions amenable to the value approach. To my mind, negative real rates of interest have "forced" people to seek out yield and to accept a higher degree of risk. For many, the increased focus on equities and dividend stocks may end badly, especially if companies lack strong balance sheets and a "wide moat".
Some Useful Sites for Value Investing
This is a very clean site which provides information about the activities of top value investors. To my mind, it is one of the best of breed: very easy to use, beautifully presented with profiles of investors which include: portfolio holdings, recent trading activity, news releases, annual reports etc. It's all here: my go-to site.
This a rich site. It features a variety of free offerings, including: profiles of the holdings of prominent investors, articles on investing, insider trading activity, and profiles of international markets. There several fee-based features, but most readers will find that the site is very useful without a subscription.
Use the site to get investment ideas (remembering that the gurus maintain large portfolios and cannot justify the cost of investing in smaller entities). Some of the articles are useful in order to "take the pulse" but remember to read them cautiously as some may be oriented to promote a viewpoint/company.
Value Investors Club
This site presents investment ideas "where top investors share their best ideas". I find it useful in that it provides access to the thinking processes of those who submit investment ideas. To my mind, this is just as valuable as those companies which are identified in the various submissions.
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