In Chicago last weekend, a big crowd -- perhaps the largest yet -- came out to hear value investor and Warren Buffett disciple Mohnish Pabrai. The leader of Pabrai Investment Funds was on hand for his company's annual shareholders' meeting, and similar to the way Buffett's annual Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) meetings tend to go, Pabrai spent the majority of his time fielding questions from the crowd, including queries about his investment fund.
It's no wonder, because as most of us know by now, the performance of his Pabrai Investment Fund is off the charts. Annualized rates of return from the fund's inception in 1999 to June 2007 have exceeded 29%, versus just a little more than 4% for the Dow. According to Smith Barney data that's derived from Lipper's mutual fund database, the fund's overall performance ranks No. 3 out of some 4,000 mutual funds, behind only the BlackRock Global Resources Fund, at 29.5%, and the ING Russia Fund, at 38.4%. Taking out Pabrai's fees -- average fund expenses are a small 8 basis points -- and his performance cut, his fund would have been No. 2 on the list.
Pabrai has learned his investing lessons well. It was no accident that he gave a significant nod to the Oracle when asked at the meeting how much cash his portfolio has on hand. Pabrai said he prefers to invest in Berkshire rather than hang on to cash, because he thinks Berkshire poses less risk than holding cash does.
Winners and losers
Pabrai's investing acumen also came out when he discussed how he's handled some of his fund's ups and downs. In talking about some past winning and losing investments, Pabrai mentioned why he made each investment and explained why each one was a winner or a loser. (And there were a lot more winners than losers.)
Along the same lines, one of the most insightful parts of the entire presentation came when Pabrai discussed a multimonth time period during which the net asset values of his fund were down by more than 30%. Yet there was no direct correlation in the fund's holdings. There was no particular sector or industry weighting on the portfolio. Each company operated in a different industry, with a different set of economic considerations. What had happened was that the Dow Jones average had dropped from around 10,000 to 7,000.
So rather than succumb to the emotional whims of Mr. Market, Pabrai correctly determined that the overall businesses were still intact. And realizing that in investing you don't get penalized for inactivity, Pabrai did nothing. Sure, he could have sold out and taken a realized loss of 15% and felt good about missing the remaining decline, but as Buffett says, "You pay a high price for a cheery consensus." Of course, it didn't take long for Mr. Market to realize he was getting too crazy, and sure enough, Pabrai's fund recovered.
Realistic about the future
Investing includes a very simple law: Performance and assets under management are inversely correlated. The bigger sums of money you have to work with, the more difficult it becomes to earn above-average market rates of return. At the meeting, Pabrai acknowledged that reality by stating two highly probable future outcomes for his investment funds going forward:
- His annual performance going forward will most likely not compare with the rates of return he has earned over the last eight years. Beginning with $1 million in 1999, the Pabrai Investment Funds now hold in excess of $600 million. With a higher capital base, exploiting the smaller market inefficiencies becomes exceedingly more difficult.
- Over the long term, Pabrai still remains confident that his results will exceed those of the overall market return. His view stems merely from the concentrated nature of his investment philosophy.
Pabrai spent nearly two hours sharing his thoughts on a wide host of topics over the weekend. One attendee managed to stump him with a question concerning the volatility of the S&P and whether the S&P provides a gauge for investment opportunity. Pabrai politely responded that "maybe you ought to ask the academics" on that one. He spends no time trying to figure out macro-type economic events.
Pabrai knows his limits. But within his field of expertise, he continues to show why he's one of the best.
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