Tomorrow in Chicago, several hundred people will come together to hear investor and Warren Buffett disciple Mohnish Pabrai hold court during his annual meeting. I imagine that most value-minded investors have already heard of Pabrai -- I saw him speak for the first time last November at the Value Investing Congress in New York -- but I predict that very soon, most of those investors will want to begin listening to what he has to say.
Here's why.
A true disciple
Pabrai has always credited Buffett for his investment successes. Calling himself a "shameless clone," he often says that he's merely copying the master. Like Buffett, who started his first investment partnership in 1956 with only $105,000, Pabrai began his first partnership in 1999 with just $1 million. And also like the Oracle, Pabrai operates with the same performance-based fee structure.
Fast-forward to today. At last count, Pabrai managed about $600 million, and the number was climbing. Just how successful has he been? Well, since 1999, he has netted an average annual rate of return of more than 27% after his fees. In other words, if you were fortunate enough to have been one of Pabrai's first investors, your $100,000 investment is now worth about $700,000. This performance ranks Pabrai's management in the top 1% of all actively managed mutual funds.
Painfully simple
Pabrai's vehicle is set up like a hedge fund, but its investment activities resemble that of a mutual fund. His approach has been painfully simple: Pabrai takes long positions only in businesses that are selling at significant discounts to intrinsic value or that offer growth at a reasonable price. No shorting, no stratospheric leveraging, no options. Just good old-fashioned investing in good companies is the modus operandi at Pabrai world headquarters. Steel manufacturer Universal Stainless (Nasdaq: USAP ) and tanker-ship owner and operator Frontline (NYSE: FRO ) are two examples of Pabrai's very successful investments using this approach.
Again following Buffett's lead, Pabrai has taken advantage of "special situations" investing, which, if executed appropriately, can yield impressive returns regardless of the market sentiment. Very broadly defined, a special-situation investment is one that depends on a specific corporate activity, rather than the demand and supply factors of the general stock market, to determine investment performance.
Pabrai's past investment in funeral-home operator Stewart Enterprises (NYSE: STEI ) and, more recently, Pinnacle Airlines (Nasdaq: PNCL ) are excellent examples of special situations. In the Stewart case, management announced a plan to begin selling off funeral homes to trim debt and generate cash flow. At Pinnacle, the key event was a contract resolution with Northwest. Both investments ended up generating returns of more than 100% for Pabrai and his investors.
Most recently, and again like Buffett's approach at Berkshire Hathaway (NYSE: BRK-A ) (NYSE: BRK-B ) , Pabrai is beginning to take more than just a passing interest in his investments. It was recently reported that Pabrai now owns more than 16% of oil producer Harvest Natural Resources (NYSE: HNR ) .
As Pabrai's reputation begins to spread, his annual meetings are likely to develop into massive Berkshire-like gatherings. It will be a while before he can match the kind of turnout that Berkshire gets for its annual meetings in Omaha -- Buffett's record there is still unmatched and unrivaled, in my book -- but the magnitude of Pabrai's meetings should indeed swell very quickly. Stay tuned for the update from Chicago.
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