Monday, 25 February 2013

Mohnish Pabrai on Investing Mistakes

Investors should listen when Mohnish Pabrai speaks.  He recently gave an enlightening interview, in which he discussed his personal experiences as an entrepreneur, and the relationship between being a businessperson and an investor; his "all-in" bet on financial companies; his "two-outta-three-ain't-bad" philosophy of investing errors, borrowed from John Templeton, and, affirmed, he claims (not convincingly, in my view) by Warren Buffett's experience; and the opportunity costs of committing capital, among other things.

I'd like to highlight, though, his candid exploration of his mistakes, a few of which led to substantial and permanent losses of capital.  One was Sears Holdings, which sits on real estate that's worth far more than the company's market cap, but can only be monetized by liquidating the business.  Despite a prominent theory which holds that people act only according to the cold calculus of economics, most CEO's are not hot on the idea of liquidating the firm they preside over (or perhaps this affirms the theory: after all, why dismantle the company that's paying you such an appealing salary?).  Either way, the alternative that's best for shareholders is not always the option that's pursued by management.

A second misstep was his investment in Pinnacle Airlines, a contract operator that flew on behalf of traditional airlines, including Delta.  While Pinnacle had a cushy cost-plus arrangement, shielding it from the challenges of the airline industry, making money from customers that are losing money is not a recipe for long-term success.  When they fall, so do you.  Pabrai concedes that he should have better understood the full economic ecosystem that Pinnacle was operating in (Charlie Munger would greatly respect this lesson, as the ecosystem is among the 100-odd "Big Ideas" that he draws wisdom from).  Finally, his worst failure was his position in Delta Financial, a company that wrote, bundled and securitized mortgages, and was felled by the recent financial crises.  His position, 10% of his portfolio, went to zero.

Nearly all prominent investors will concede that they've made mistakes, but when pressed to provide specific examples, few are keen on discussing them in detail.  Post-mortems are grim, after all.  But kudos to Pabrai for doing so, and allowing the rest of us the opportunity to learn from his mistakes for free, rather than paying to do so first-hand.

Here is a review of Pabrai's book The Dhandho Investor

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