Author Topic: Notes from meeting with Mohnish Pabrai (by Ashish Kila)  (Read 5460 times)

berkshiremystery

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Notes from meeting with Mohnish Pabrai (by Ashish Kila)
« on: October 07, 2012, 05:16:05 AM »
Ashish Kila has some interesting notes from a meeting with Mohnish Pabrai.

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Notes from meeting with value investor Mr. Mohnish Pabrai
Monday, August 13, 2012

Mr. Ashish Kila had an opportunity to interact with Mr. Mohnish Pabrai at MDI (lecture organised by Mr. Sanjay Bakshi & Mr. Amitabh Singhi) where Mr. Pabrai presented his astute insights regarding the course of action investors should adopt in ever uncertain markets. Note: - We have humbly tried to make some additions (highlighted in Italics) to the note below for better understanding of the content.

http://perfectresearch.blogspot.de/2012/08/notes-from-meeting-with-value-investor.html


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How to go about Cash Allocation

- When an investor finds a stock that has a potential to turn into a two bagger, 75% of the total portfolio allocation should be made towards such stocks.
- For the remaining 25% of the portfolio, the investor becomes more conscious and conservative and tries to find an investment that will be either a three bagger or a five bagger.
- The remaining Allocation should be made in the proportion of 10% for a 3 bagger another 10% for a four bagger and remaining 5% for a potential five bagger.

- Here the seasoned investors raised a question regarding the time frame one should have patience and let the investment attain its true value.
- Mr. Pabrai showed the real strength of patience by quoting the example of Daily Journal’s investments under the guidance of Charlie Munger 
- Charlie Munger had the company’s money invested in treasuries for almost 10 years till he found a potential multi bagger in Wells Fargo and Bank and within 1 quarter he invested 100% of the treasuries amount in the stock.

« Last Edit: October 07, 2012, 05:24:52 AM by berkshiremystery »


hellsten

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Re: Notes from meeting with Mohnish Pabrai (by Ashish Kila)
« Reply #1 on: October 07, 2012, 09:30:47 AM »
Thanks. A bit unstructured, but IMO one the best articles on Mohnish Pabrai.

alwaysinvert

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Re: Notes from meeting with Mohnish Pabrai (by Ashish Kila)
« Reply #2 on: October 07, 2012, 10:27:51 AM »
You should allocate more towards lower potential return? I don't get it.

racemize

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Re: Notes from meeting with Mohnish Pabrai (by Ashish Kila)
« Reply #3 on: October 07, 2012, 11:32:50 AM »
You should allocate more towards lower potential return? I don't get it.

I think it is just a way to ensure that you value cash more as you have less of it.  If you are 100% cash, it is important to get stocks, and a double will do fine (but of course, higher is better).  As you get to 10%, your money is more dear, so it should be restricted to those allowing for at least 3-5x.  That sort of thing.

Packer16

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Re: Notes from meeting with Mohnish Pabrai (by Ashish Kila)
« Reply #4 on: October 07, 2012, 02:09:26 PM »
I think part of the allocation rationale is the higher potential return investments are typically higher risk situations (i.e. the downside is greater).

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alwaysinvert

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Re: Notes from meeting with Mohnish Pabrai (by Ashish Kila)
« Reply #5 on: October 07, 2012, 04:03:03 PM »
I understand now and it makes sense. Thanks for the clarifications!

infinitee00

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Re: Notes from meeting with Mohnish Pabrai (by Ashish Kila)
« Reply #6 on: October 07, 2012, 06:49:11 PM »
Quote
When an investor finds a stock that has a potential to turn into a two bagger, 75% of the total portfolio allocation should be made towards such stocks.

I am a fan of Pabrai and like the way he thinks about investments, but I do not quite agree with his idea of portfolio sizing and the assertions of a lot of value investors like him, who profess extreme concentration. I have a fairly concentrated portfolio myself but the above is pretty extreme advice, no to mention dangerous for novice investors who do not know any better. If one has a few thousand dollars to play with, this advice may be fine but anyone with decent amount of capital would be imprudent to follow this advice.

There is a possibility that such portfolio allocation can lead to someone getting crazy rich in a very short period of time, provided of course everything plays out perfectly but it can also lead to serious permanent loss of capital - losses from which an investor might take a long time to recover or never recover at all.  Just because it worked for someone ( Munger in this example) in the past does not mean it will work for everyone ( after all not everyone is a Munger, Buffett or Pabrai) or that everyone should follow his/her lead in portfolio sizing. A single success story is too small a data set to come to any conclusion and is a clear example of confirmation, survivorship and availability bias at work.

The question one needs to ask before putting 75% of one's portfolio in a single stock is the assumption behind it - how can one be reasonably sure that it will be turn out to be a 2-bagger ? In fact, further down the link above Pabrai says - "Humans don’t know the price of anything". No matter how good one's analysis/estimate of a company's intrinsic value is or how certain one feels that the future will exactly turn out to be as one envisions, I doubt if anyone can predict 2-baggers with any consistency ( reliably, and over long periods of time).  Not to mention, value realization can take a long time, during which a number of things can go wrong. The strange thing about investing is that we invest in the present but invest for the future. With the future being cloudy and the return on any single stock uncertain, barring a trip to the fortune teller, the only way to hedge against black swans or human error is to be diversified accordingly.

I know that Pabrai is a fan of the Kelly criterion for investment sizing and I surmise this is where he gets his 75% number from, but if one reads carefully about the caveats to Kelly investment sizing, a 75% allocation  in one investment sounds somewhat reckless. In fact, I doubt if even Pabrai buys into his own advice about portfolio sizing as none of his investments have that kind of a % invested ( I remember, he once said that before the 2008 crisis he used to follow a 10% in 10 position type of portfolio allocation).  As far as I have read, Graham, Lynch, Schloss all did extremely well over the years even when they were heavily diversified. So I hope that investors, especially novice investors, think carefully before subscribing to the 'extreme concentration' school of thought.

alexbossert

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Re: Notes from meeting with Mohnish Pabrai (by Ashish Kila)
« Reply #7 on: October 07, 2012, 07:47:25 PM »
infinitee00,

I think you misread the notes from his speech. He said 75% of the portfolio should be allocated towards such stocks. He didn't say allocate 75% into just one stock. From my close observation, Mohnish allocates at most 10% of the fund in one stock.

Alex Bossert

infinitee00

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Re: Notes from meeting with Mohnish Pabrai (by Ashish Kila)
« Reply #8 on: October 07, 2012, 08:39:30 PM »
Initially I thought I may have misunderstood his comment too, but his Munger example of investing 100% treasuries in one stock - Wells Fargo - made me think otherwise. Moreover, since he didn't specify how many stocks he would invest his 75% in, a person with a $1Million portfolio, can invest 75% or 750K in 75 potential 2-bagger stocks with a 10K position or in 150 5K positions. That would be very diversified and I doubt Pabrai meant such a diversified asset allocation.

In any case, my point was that extreme concentration may not always be the best asset allocation strategy for investors.