What I like and admire with Pabrai is his concentrated portfolio. Sometimes, I also have stocks that make more than 50% of my portfolio. So, I always listen when Pabrai speaks. I am connected with him on Linkedin where he shared an article (connect with me if you wish, always nice to meet people) about a recent interview. In this article I’ll go through what he is saying and give my perspective on what we, value investors can learn.
The investing tips discussed are (5 quotes used too):
- CONCENTRATED PORTFOLIO AT A PE RATIO OF 1 OR LESS
- 3 REASONS WHY INVESTMENTS DON’T WORK OUT (CHECK LIST)
- CLONING STOCK INVESTMENTS
- DON’T THINK ABOUT MACRO
- NO INTEREST IN THE US
- TAKE A NAP
Concentrated portfolio and PE ratios of 1
As I already mentioned, Pabrai has an extremely concentrated portfolio. He buys companies at what he calls PE ratios of 1 or less. He does that by looking at unfavourable industries, like the car industry in 2012, he finds companies that will not go bust and have potential to deliver high earnings in the future. For example, in 2012, he was buying Fiat-Chrysler (FCAU) at an average price of $4. The current EPS is $2.22. If we deduct 40% of the 2012 purchase price as the value gotten from Ferrari, we get to a PE ratio close to 1. Needless to say, FCAU’s stock is now at $17. On top of that, we have to add the Ferrari spinoff that has a market cap almost as big as FCAU. Double the gain there for Pabrai.
FCAU stock price:
As for finding such stocks, Pabrai tells us how we have to keep our eyes open as such opportunities arise once every few years.
What I found over a 19-20 year investing history is that these, what I call the PE of 1s, tend to show up an idea every two or three years.
The last similar opportunity he took advantage off was in Indian real estate in Mumbai. He bought 10% of the company Sunteck.
Pabrai bought Sunteck after the demonetization process hit the Indian economy:
3 reasons why investments don’t work out for investors?
Pabrai discloses 3 reasons:
The single biggest reason why investments don’t work out for investors is leverage.
This is followed by misunderstanding of the comparative advantage of the moat where investors think there is one but there really isn’t. And the third reason is management. Quality management is what makes the difference between great and mediocre investments.
Cloning stock investments – Portfolio Crown Jewels of other investors
Pabrai discusses how he still hates the auto industry due to high capex, unions and consumer tastes. However, he is humble to say that the only reason he owns Fiat Chrysler is because he studied two investors he admires who had a position in General Motors. As discussed in the video here, Einhorn also opened a position in GM in 2012.
Also, he is so humble to share that he found Rain Industries because someone sent him an extremely well written report:
Don’t think about macro
Investors should spend zero time thinking about macro anything. Just completely ignore it because it is hard enough to figure out the future of one business. In almost all cases micro will trump macro in a major way.
Here I must say I agree, the micro will trump the macro in a major way. Over the long term, good businesses will do great and that is what we have to understand. Nobody can time a recession or a bear market. However, Pabrai discloses also how he has lots of cash at the moment. This is probably not due to the macro, but because of the lack of opportunities.
No Interest in the US
The US is becoming harder and harder to invest in.
The number of stocks in the US declined from 8,000 twenty years ago to less than 3,500. Thus, a smaller number of companies and more analysts following those. This makes it difficult to find gems. Up to 5 years ago, 80% to 90% of his portfolio was in the US.
Take an afternoon nap
Usually, I take an afternoon nap on most days.
Pabrai believes you can increase your productivity by taking an afternoon nap and that even Buffett has a nap room in his office.
I always love to learn from the best investors out there, I am not taking naps, I don’t think I need them, but I spend most of my time doing research and looking for undervalued stocks. I am currently looking at the complete list of Chinese stocks traded in the US, trying to find good investments in China, where stocks are still relatively cheap. However, I am intrigued by Pabrai’s less than 1 PE ratio investing which is something possible to do when I think about it. The last time I was buying a stock at a PE ratio of 1 was Cemig (NYSE: CIG) in January of 2016.
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