March 6, 2011 1 Comment
Mohnish Pabrai is an Indian-American businessman and deep value investor.He is the managing partner of the Pabrai Investment Funds, which he founded in 1999.He is also a member of the Young President’s Organization (YPO) and a charter member of The Indus Entrepreneurs (TIE).
Monhnish Pabrai first trained as a computer engineer. He then spent nearly two decades in the tech field.In 1990, he quit his job working as an engineer for Tellabs in Chicago and abandoned his master’s thesis at the Illinois Institute of Technology to launch TransTech, an IT consulting and systems integration company, which he funded with $30,000 from his retirement account and $70,000 from credit cards.His father encouraged him in the endeavour,saying that it was the right thing to do as staying at Tellabs and following the staid boring corporate path was high risk. Starting a business on the other hand was low risk, could give high returns and high adventure. As Monaish was single at the time there were few complications and in the worst case, he would lose everything ,which wasn’t much anyway,and could declare personal bankruptcy and start over. By 1999, Transtech, which had grown to 200 employees and $30 million in revenues, held no thrill. So he sold it. And during the tech boom,he started another company, internet incubator Digital Disrupters, which had a very painful and swift demise due the tightening of capital markets .In 2000, he sold TransTech to Kurt Salmon Associates.During late 1999, with nine other investors contributing $100,000 each,Mohnish started Pabrai Funds with $1,000,000 in assets. Pabrai Funds was modelled on the original “Buffett Partnership.”
Mohnish Parbai calls himself a shameless cloner of Warren Buffett.He imitates him in almost every sphere of work, including operating alone and unobtrusively. In his spare time, he loves reading, playing duplicate bridge and analyzing businesses using Munger’s Latticework of Mental Models and the Buffett’s special situations and “moat-based” investment approach.Initially he even wished to go to work for Warren Buffett and wrote to him about it only to be turned down as Buffett preferred to work alone.Such is his unalloyed admiration for the Oracle of Omaha that Pabrai bid for four years on eBay for lunch with Buffett. He missed each time.However in 2007 the joint bid by Pabrai and his partner Guy Spier of Aquamarine Capital Management,0f US $650,100, beat out others for the now famous lunch at New York’s Smith&Wollensky, described as the steakhouse to end all arguments. Pabrai met Buffett with his wife Harina Kapoor and their two daughters Monsoon and Momachi and paid two-thirds of the bid amount.In his book “Mosaic: Perspectives on Investing”Pabrai has distilled the Warren Buffett method of investing down to a few points. These points are made in a series of articles he authored for various newsletters and web sites between 2001 and 2003.
Mohnish Pabrai believes in getting all the benefits of leverage with none of the risks both in his investments and businesses.In his book ”The Dhandho Investor: The Low – Risk Value Method to High Returns”, Pabrai examines the low-risk, high-return “Dhandho” (meaning ‘endevours that create wealth’ or ‘business’ in Gujarati) approach to business of the Patels from India who have quietly begun to dominate the motel industry in the US.He combines the ideas of “dhandho” , learnt from his father who was an entrepreneur and real-estate owner, and the principles of his value investing gurus such as Benjamin Graham, Warren Buffett, Charles Munger and others, to find ”Heads, I win! Tails, I don’t lose that much!” situations .He also believes in”Few Bets, Big Bets, Infrequent Bets.”
Pabrai believes that the secret to investment success, is to not confuse activity with productivity. In a 2002 article in the online journal Motley Fool, he elaborated on this by quoting the 17th century French scientist Blaise Pascal, best remembered for his contributions to pure geometry and inventions such as the syringe, the hydraulic press, and the first digital calculator: “All man’s miseries derive from not being able to sit quietly in a room alone.”Like Buffett, who often spends years without buying a single share, Pabrai puts his own spin on the Pascal principle: “All portfolio managers’ miseries derive from not being able to sit quietly in a room alone.”He often claims not to do a whole lot other than read and wait for the occasional “loud shout” to make an investment. He says his calendar is mostly empty and he does not have more than one meeting a week. He even takes a nap most afternoons.
Among Pabrai’s classic value investments that is spoken of in admiration in the market is when he dipped into the Norwegian oil tanker firm Frontline in 2002 soon after shipping rates fell to $5,000 a day. To remain profitable, the company needed rates of at least $18,000 a day on its 70 double-hulled oil tankers. Investors fled the stock, and it fell to $3.Frontline wasn’t considered a classic value play since it didn’t have much by way of net current assets. But it had hard assets in the form of tankers. Pabrai studied the oil shipping business and discovered that small Greek shippers with near-obsolete single-hulled tankers were being hurt more than Frontline and were selling their ships for scrap. So he knew that when oil demand next surged, Frontline would be able to command premium rates. Months later, Frontline was charging $50,000 a day per tanker and Pabrai made a killing.
Mohnish Pabrai also has interesting insights to offer on entrepreneurship from his experience.He believes that unlike the common belief, the overwhelming majority of entrepreneurs are not risk-takers.They try hard to eliminate risk and make nearly risk-free bets. Successful entrepreneurs are usually very good at dealing with high uncertainty and low risk.He believes that the best book on the subject is “The Origin and Evolution of New Businesses” by Amar Bhide who spent many years interviewing dozens of entrepreneurs. He also points out that,biographies/autobiographies of nearly every entrepreneur from Sam Walton to Richard Branson to Michael Dell is in sync with Bhide’s thesis.He believes that Richard Branson’s “Losing MyVirginity” is a very good read for any would be entrepreneur and demonstrates low-risk entrepreneurship very well. He points out that even today, with many billions of dollars in annual revenues, Virgin makes near risk-free bets with its new ventures.
After his mistake with Digital Disrupters he believes that that capital is unnecessary for the successful formation and growth of nearly all businesses. He points out that of his three business ventures two were started with virtually no capital and made a lot of money. One started with lots of capital and lost lots of money. He thinks that having lots of capital in a start-up just amplifies the mistakes.
And after my last post http://wealthymatters.com/2011/03/04/on-why-money-management-is-a-great-business/ if anybody is considering becoming a money manager here is some gyan from Pabrai “Before taking other people’s money one should have done investing for a few years with your own funds and compare the performance to the best money managers around. If your long-term results are great,then, I think Nike expresses it best: Just Do It!”