ZINC - Horsehead Holding Corp

[Vish_ram]

I think with an exception of few companies that are well capitalized, leader in their industry, almost all small cap commodity companies end up going belly up.

 

Let us take Teck resources, that was labeled as "IBM of mining" by a value investor who made 7 or 10 times on it and sold it out near the top. The stock later went from 62.x to 3.x for last 8 years. Was 7X made using greater fool theory/luck or by brilliance? Why did IBM of mining's stock fail spectacularly?

 

What lesson do you learn from your successful investment that later goes down 90%?

[LC]

What lesson do you learn from your successful investment that later goes down 90%?

 

Good businesses fail from the emergence of better businesses.

 

Bad businesses fail for all the other reasons.

[tylerdurden]

I think with an exception of few companies that are well capitalized, leader in their industry, almost all small cap commodity companies end up going belly up.

 

Let us take Teck resources, that was labeled as "IBM of mining" by a value investor who made 7 or 10 times on it and sold it out near the top. The stock later went from 62.x to 3.x for last 8 years. Was 7X made using greater fool theory/luck or by brilliance? Why did IBM of mining's stock fail spectacularly?

 

What lesson do you learn from your successful investment that later goes down 90%?

 

You gotta sell when you are up! If not you'd tell how wonderful the Princeton educated CEO was in fact who accidentally bankrupted your largest investment:-) Anyways i think it is a fair point you raise but if we look into this in 10-20-30 year increments there would be many less successful investments, right? Coca Cola, Amex would WEB have done those investments today? Not so sure either...

[tylerdurden]

 

Anyway don't really care to crap on the guy, just wish he would stop with all these talks like he knows everything and then name drop his old returns while telling people not to speak his recent returns into the public domain.  It strikes me as someone who needs to tone it back a few notches and maybe that's why the "anonymous finance" world is so quick to criticize Pabrai.  Investing isn't easy and I'm kind of sick of him acting like it's really easy.  Doesn't Munger have a quote about investing not being easy?  That's a rhetorical question....

 

I have to agree with this. I am thankful I learned some concepts from Pabrai/Spier to begin with but I just think they are not being fully honest with this cloning etc. concepts. As many people mentioned on this, too much marketing coming out from this guy and it does not have anything to do how his investment record is.

[randomep]

It would be easy to drop the boot in for entering into ZINC but everyone makes mistakes, the real issue here I think is one of position sizing.

 

 

I have a big problem with your conclusion max alpha. This is basically Pabrai's analysis of what went wrong. So effectively you two are saying that if Pabrai encounters a similar investment to ZINC, Pinnacle, Lear etc he will take it, only this time with a smaller bet. So in your eyes there is nothing wrong with his process of choosing these high risk bets. I don't know if his long term investors agree after two blowup years: 2008 and 2015.

 

So if he follows through he will buy 5 of these type of stocks to get the same type of portfolio exposure?  I wonder how he can possibly study 5 complex investments at one time w/o someone helping him read filings and do research.

 

Or maybe he will just make a 4% bet at a time, kind of like buying a lottery ticket in addition to his core portfolio?

 

I'm not condoning the investment, it looked like a poor investment and I have said as much previously and attempted to convince people so in this thread. I haven't looked into his other investments so I can't speak to that.

 

It just sounds like a lot of people are crying foul because they blindly followed him into a company throwing the kitchen sink at a single project in the commodity space. If the plant ended up working at slightly less than nameplate capacity like the vast majority of processing plants do everyone around here would have been singing his praises and talking about how clever he was and following him headlong into the next bet.

 

Instead it was a low probability engineering disaster and the plant achieved a small fraction of nameplate capacity and somehow the company had no recompense, an uncommon although not unheard of scenario.

 

Investing in stable companies with a conservative balance sheet isn't the only way to make money.

 

 

max, I jumped to conclusion on your post......

 

But Pabrai seems to say his decision making is sound...... either that or he is going to have to seriously re-invent an investment strategy..... if so that would the the second time he has done that in 6 years....... my question in that case is, why are investors paying him 6 over 25 to learn on the fly?

 

 

[rishig]

It would be easy to drop the boot in for entering into ZINC but everyone makes mistakes, the real issue here I think is one of position sizing.

 

 

I have a big problem with your conclusion max alpha. This is basically Pabrai's analysis of what went wrong. So effectively you two are saying that if Pabrai encounters a similar investment to ZINC, Pinnacle, Lear etc he will take it, only this time with a smaller bet. So in your eyes there is nothing wrong with his process of choosing these high risk bets. I don't know if his long term investors agree after two blowup years: 2008 and 2015.

 

So if he follows through he will buy 5 of these type of stocks to get the same type of portfolio exposure?  I wonder how he can possibly study 5 complex investments at one time w/o someone helping him read filings and do research.

 

Or maybe he will just make a 4% bet at a time, kind of like buying a lottery ticket in addition to his core portfolio?

 

I'm not condoning the investment, it looked like a poor investment and I have said as much previously and attempted to convince people so in this thread. I haven't looked into his other investments so I can't speak to that.

 

It just sounds like a lot of people are crying foul because they blindly followed him into a company throwing the kitchen sink at a single project in the commodity space. If the plant ended up working at slightly less than nameplate capacity like the vast majority of processing plants do everyone around here would have been singing his praises and talking about how clever he was and following him headlong into the next bet.

 

Instead it was a low probability engineering disaster and the plant achieved a small fraction of nameplate capacity and somehow the company had no recompense, an uncommon although not unheard of scenario.

 

Investing in stable companies with a conservative balance sheet isn't the only way to make money.

 

 

max, I jumped to conclusion on your post......

 

But Pabrai seems to say his decision making is sound...... either that or he is going to have to seriously re-invent an investment strategy..... if so that would the the second time he has done that in 6 years....... my question in that case is, why are investors paying him 6 over 25 to learn on the fly?

 

I am being nit picky, but investors aren't paying him 25% profit over 6% hurdle rate *unless* the fund is over the high water mark - which itself compounds from prior year's water mark at 6% rate. He has yet to catch up to the high water from a few years ago. So, investors aren't paying anything since 2009 or 2010. One may say that's fair given his performance. From an ethical point, I admire how his compensation structure has been set up.

[undervalued]

It would be easy to drop the boot in for entering into ZINC but everyone makes mistakes, the real issue here I think is one of position sizing.

 

 

I have a big problem with your conclusion max alpha. This is basically Pabrai's analysis of what went wrong. So effectively you two are saying that if Pabrai encounters a similar investment to ZINC, Pinnacle, Lear etc he will take it, only this time with a smaller bet. So in your eyes there is nothing wrong with his process of choosing these high risk bets. I don't know if his long term investors agree after two blowup years: 2008 and 2015.

 

So if he follows through he will buy 5 of these type of stocks to get the same type of portfolio exposure?  I wonder how he can possibly study 5 complex investments at one time w/o someone helping him read filings and do research.

 

Or maybe he will just make a 4% bet at a time, kind of like buying a lottery ticket in addition to his core portfolio?

 

I'm not condoning the investment, it looked like a poor investment and I have said as much previously and attempted to convince people so in this thread. I haven't looked into his other investments so I can't speak to that.

 

It just sounds like a lot of people are crying foul because they blindly followed him into a company throwing the kitchen sink at a single project in the commodity space. If the plant ended up working at slightly less than nameplate capacity like the vast majority of processing plants do everyone around here would have been singing his praises and talking about how clever he was and following him headlong into the next bet.

 

Instead it was a low probability engineering disaster and the plant achieved a small fraction of nameplate capacity and somehow the company had no recompense, an uncommon although not unheard of scenario.

 

Investing in stable companies with a conservative balance sheet isn't the only way to make money.

 

 

max, I jumped to conclusion on your post......

 

But Pabrai seems to say his decision making is sound...... either that or he is going to have to seriously re-invent an investment strategy..... if so that would the the second time he has done that in 6 years....... my question in that case is, why are investors paying him 6 over 25 to learn on the fly?

 

I am being nit picky, but investors aren't paying him 25% profit over 6% hurdle rate *unless* the fund is over the high water mark - which itself compounds from prior year's water mark at 6% rate. He has yet to catch up to the high water from a few years ago. So, investors aren't paying anything since 2009 or 2010. One may say that's fair given his performance. From an ethical point, I admire how his compensation structure has been set up.

 

I blame myself for this mistake. The facts did not change (management kept saying there is issues multiple times and couldn't get ramp up multiple times) and I did not change my mind. Invert right? LOL

[ERICOPOLY]

How is this different from investing in a startup?  Management promises they know how to get things up and running... doesn't every startup say something like that?

[undervalued]

How is this different from investing in a startup?  Management promises they know how to get things up and running... doesn't every startup say something like that?

 

It's probably the same as investing in startup and portfolio sizing should be sized like a startup. When they shut down the old plant and invest fully in the new plant, this should be treated like a startup.

[ERICOPOLY]

 

Think or know? I'd be curious if that was specifically in the disclosure documents.

 

I was wrong -- deleted.

[zenith]

according to latest filings, Dalal street sold the last portion, but pabrai still has about a million shares in his name.

also Blackrock reported a stake over 5%, but they already had one, so not sure if it was increased.

[Txvestor]

My observstions on Pabrai's investment in this security.

This was most certainly not a low risk, high uncertainty situation. It was more a high risk, high uncertainty scenario. Anytime you are commodity dependent and not well financed/hedged well beyond your needs, it is by definition not low risk.

Position sizing was out of bounds of his description of planned portfolio allocation. It was a position well north of 100M at one stage and even on a cost basis likely represented a much greater than 10% portfolio investment and over 30% of AUM at one stage.

I don't really buy the 'if I were under 4.9% we'd have sold' argument, as he added going into the end of the year. I suspected he was worried that him selling would trigger a collapse, but surely adding was an error of commission that can't be explained by the position size.

The loss of management credibility did not happen all at once, it was a process and it happened over time, a fairly long time during which there was ample opportunity to exit, had we looked at the situation objectively. The decision not to either monetize or leverage Inmetco and Zochem much earlier when credit markets were loose and the plant having ramp up problems was an enormous blunder by management.

The ramp up of the plant was an utter disgrace. Whatever the engineering challenges, when the survival of the company is potentially at stake, you expect better planning and organization. As doing the plant itself was a decision that arguably didn't need to happen, it was an investment. Even bringing in the outside consultants was done really late in the game and wreaks of desperation rather than planning. Unlike other posters, I'm really not seeing any latitude whatsoever for defending the incompetence of the management here. They did a very poor job and an astute investor/manager watching closely should have seen that a lot earlier. Heck even I saw it, when they kept missing promises, but figured Mohnish had it covered when he added. In fact, I posted about my concerns about management competence, just didn't act on it.

I think it has been mentioned quite a few times before that the worst part of this undeniable error was position sizing, yet we see a position of near 40% at one point in Fiat. Even now its a massive position. I know he's struggled with position sizing in the past but I don't get the impression that he has that issue well resolved in his head yet. As I posted earlier, someone taking such concentrated positions needs to have a hit rate approaching 100% as they can wipe out many good decisions(and years of compounding) with just one bad one. 2/3 just ain't good enough and leaves too much to chance.

Finally, I wholeheartedly agree that Mohnish doesn't owe anyone but his LPs any explanation whatsoever for his decisions. And i also agree that it is each investors sole responsibility to do their due diligence and follow their instincts and not outsource it. That said, he promotes cloning like noone else, and the concept of cloning is having safety guards or a cheap(free) way of outsourcing some of the research to a respected investor. Yet it obviously has its pitfalls as we are learning here. Irony is I never expected the greatest proponent of cloning to teach me that lesson himself!

My view is Mohnish has a lot more introspection to do on this investment, and is still sorting it out in his own mind. I think he will eventually be a better investor for this, and I'd sure like to see him get better on his journey, as he is a gem of a person.

[dabuff]

My thoughts exactly txinvestor. Thanks for your post.

 

The least we can do is rub our noses in our mistakes so as not to repeat them (apologies to Munger).

[dabuff]

To be fair the past year has been full of highly concentrated clones that could easily have gone wrong - including CHK, VRX, PKX.

 

Moral of the story: don't fall prety to authority bias, and do your own research.

 

When someone once asked Buffett why he invested in a stock, he said "because Ben Graham did."

 

"Strike one."

 

 

[walt373]

I wonder if Pabrai is familiar with the Kelly Criterion? You can underbet but never overbet.

 

https://www.goodetrades.com/2009/07/use-the-kelly-criterion-to-determine-position-size/

 

[dabuff]

He is certainly familiar with the Kelly criterion - outlined in the Dhandho Investor.

 

Interestingly though, he has stated in interviews that he does not subscribe to using the Kelly criterion to making investment weighting decisions anymore.

[walt373]

Kelly gives you the upper limit. I don't think it's safe to use as a target if the inputs are uncertain, which they are for stocks (as opposed to blackjack for example). So if there's any doubt, you're probably better off reducing size. It's not hard to argue Fiat at 40% of portfolio is overbetting. I think the takeaway from Kelly is that investors should err on the side of underbetting, an especially important point for concentrated/leveraged investors.

[randomep]

 

 

I am being nit picky, but investors aren't paying him 25% profit over 6% hurdle rate *unless* the fund is over the high water mark - which itself compounds from prior year's water mark at 6% rate. He has yet to catch up to the high water from a few years ago. So, investors aren't paying anything since 2009 or 2010. One may say that's fair given his performance. From an ethical point, I admire how his compensation structure has been set up.

 

I am being nit picky on your nit picky, but doesn't every dollar deposited with Pabrai's fund have its own high water mark? I mean someone could come in at the bottom in 2009 and double or triple whatever his money from that point to now. He will have to pay Pabrai fees no? This isn't a lot as I suppose very few invested with Pabrai after the crash, but I guestimate it is on the order of single digit millions.

 

 

BTW, I admit I totally missed the high water mark until you brought it up, thanks.

[rishig]

 

 

I am being nit picky, but investors aren't paying him 25% profit over 6% hurdle rate *unless* the fund is over the high water mark - which itself compounds from prior year's water mark at 6% rate. He has yet to catch up to the high water from a few years ago. So, investors aren't paying anything since 2009 or 2010. One may say that's fair given his performance. From an ethical point, I admire how his compensation structure has been set up.

 

I am being nit picky on your nit picky, but doesn't every dollar deposited with Pabrai's fund have its own high water mark? I mean someone could come in at the bottom in 2009 and double or triple whatever his money from that point to now. He will have to pay Pabrai fees no? This isn't a lot as I suppose very few invested with Pabrai after the crash, but I guestimate it is on the order of single digit millions.

 

 

BTW, I admit I totally missed the high water mark until you brought it up, thanks.

 

No, the high water mark is not on personal performance based on the timing you invest. It is based on the fund's high water mark. So, in fact, if you got in 2009, you would have gotten the outperformance yet paid nothing, because the fund has not its high water mark despite the outperformance post 2009 (due to the blowup on the years before).

 

So, if the fund were open, and you put in your money today, thanks to the poor performance in 2015, its going to be a long time before you pay a dime (obviously if you believe that Mr. Pabrai can outperform going forward).

 

I think he has a very fair compensation plan set up. I fact, if there were another fund that had first few years of poor performance, they would have shutdown due to lack of revenue. Since Mr. Pabrai is wealthy, he can afford to go on without pay.

[AzCactus]

 

 

I am being nit picky, but investors aren't paying him 25% profit over 6% hurdle rate *unless* the fund is over the high water mark - which itself compounds from prior year's water mark at 6% rate. He has yet to catch up to the high water from a few years ago. So, investors aren't paying anything since 2009 or 2010. One may say that's fair given his performance. From an ethical point, I admire how his compensation structure has been set up.

 

I am being nit picky on your nit picky, but doesn't every dollar deposited with Pabrai's fund have its own high water mark? I mean someone could come in at the bottom in 2009 and double or triple whatever his money from that point to now. He will have to pay Pabrai fees no? This isn't a lot as I suppose very few invested with Pabrai after the crash, but I guestimate it is on the order of single digit millions.

 

 

BTW, I admit I totally missed the high water mark until you brought it up, thanks.

 

No, the high water mark is not on personal performance based on the timing you invest. It is based on the fund's high water mark. So, in fact, if you got in 2009, you would have gotten the outperformance yet paid nothing, because the fund has not its high water mark despite the outperformance post 2009 (due to the blowup on the years before).

 

So, if the fund were open, and you put in your money today, thanks to the poor performance in 2015, its going to be a long time before you pay a dime (obviously if you believe that Mr. Pabrai can outperform going forward).

 

I think he has a very fair compensation plan set up. I fact, if there were another fund that had first few years of poor performance, they would have shutdown due to lack of revenue. Since Mr. Pabrai is wealthy, he can afford to go on without pay.

 

His compensation structure being fair isn't something that people are going to generally disagree with.  The general problem I have is with his attitude.  He appears a bit aloof to the hard work required to consistent perform well.  A quick side note when buffett and gates were asked the key to success they both replied focus.  Pabrai seems to tell students the key to success is vacationing on the beach most of the time.

[RadMan24]

In other news, anyone think they'll get financing in Ch 11 or just sell off assets and someone buys the horsehead facility on the cheap?

[ERICOPOLY]

 

 

I am being nit picky, but investors aren't paying him 25% profit over 6% hurdle rate *unless* the fund is over the high water mark - which itself compounds from prior year's water mark at 6% rate. He has yet to catch up to the high water from a few years ago. So, investors aren't paying anything since 2009 or 2010. One may say that's fair given his performance. From an ethical point, I admire how his compensation structure has been set up.

 

I am being nit picky on your nit picky, but doesn't every dollar deposited with Pabrai's fund have its own high water mark? I mean someone could come in at the bottom in 2009 and double or triple whatever his money from that point to now. He will have to pay Pabrai fees no? This isn't a lot as I suppose very few invested with Pabrai after the crash, but I guestimate it is on the order of single digit millions.

 

 

BTW, I admit I totally missed the high water mark until you brought it up, thanks.

 

No, the high water mark is not on personal performance based on the timing you invest. It is based on the fund's high water mark. So, in fact, if you got in 2009, you would have gotten the outperformance yet paid nothing, because the fund has not its high water mark despite the outperformance post 2009 (due to the blowup on the years before).

 

So, if the fund were open, and you put in your money today, thanks to the poor performance in 2015, its going to be a long time before you pay a dime (obviously if you believe that Mr. Pabrai can outperform going forward).

 

I think he has a very fair compensation plan set up. I fact, if there were another fund that had first few years of poor performance, they would have shutdown due to lack of revenue. Since Mr. Pabrai is wealthy, he can afford to go on without pay.

 

His compensation structure being fair isn't something that people are going to generally disagree with.  The general problem I have is with his attitude.  He appears a bit aloof to the hard work required to consistent perform well.  A quick side note when buffett and gates were asked the key to success they both replied focus.  Pabrai seems to tell students the key to success is vacationing on the beach most of the time.

 

I think the going to the beach attitude was also pushed by Buffett in the 1990 chairman's letter: 

 

" Lethargy bordering on sloth remains the cornerstone of our investment style"

[Txvestor]

Based on the very pitiful design and ramp up process. I doubt anyone puts more money into that lemon. I suspect it gets carved up and sold for scraps.

For anyone sensible to put money into it, they will need a 3rd party to verify a path to full operations. How can anyone outside of that specific area of work, know that with any degree of certainty. And even if this is salvaged by a 3rd party one would think this management will clearly need to make way.

[Picasso]

I think the going to the beach attitude was also pushed by Buffett in the 1990 chairman's letter: 

 

" Lethargy bordering on sloth remains the cornerstone of our investment style"

 

I think the context of Buffett's comment was more to say that you find a really good business and sit on your ass.  Not sure you can buy ZINC, GM, FCAU, CHK, PKX and sit on your ass.  It also doesn't imply that you can sit on your ass and find a good business.  It takes a lot of work to find what makes a business great and understand why you're getting it at a good price.

 

You buy stuff like ZINC or GM and you constantly have to sleep with one eye open.  Not that it's necessarily bad but it's not something you step away and ignore the stock quote for weeks at a time.  I mean FCAU has had lots of good news and the stock keeps going down.  Isn't that helpful as an investor to know that good news is hurting your stock, perhaps means your thesis is priced in?  I recall Pabrai saying that FCAU would be worth 3x where it is today after the RACE spin but here we are and it hasn't happened; it's actually dropped a lot.  What's the market telling Pabrai?  Is he just going to ignore that because short term prices don't matter?

 

Which brings me to the other Pabrai philosophy of not looking at market prices all the time.  What's wrong with looking at market prices all the time?  You shouldn't let it affect your judgement but it's probably in your interest to know where things you would like to buy or sell are trading.  Obviously every second of the day is useless, but I think these guys pull the Buffett commentary to a weird extreme.  I bet you Buffett knows where IBM trades throughout the day while not being completely glued to the screen.

 

Could be wrong though, haven't read that 1990 letter in a while.  But there's this whole "do as Buffett does but not as he says" and some of the things Pabrai tries to emulate are probably not the things you want to take too seriously. 

[Picasso]

Actually here are Buffett's holdings in 1990:

 

                                                                12/31/90

  Shares    Company                                  Cost        Market

  ------    -------                              ----------    ----------

                                                      (000s omitted)

3,000,000  Capital Cities/ABC, Inc. ............ $  517,500    $1,377,375

46,700,000  The Coca-Cola Co. ...................  1,023,920    2,171,550

2,400,000  Federal Home Loan Mortgage Corp. ....    71,729      117,000

6,850,000  GEICO Corp. .........................    45,713    1,110,556

1,727,765  The Washington Post Company .........      9,731      342,097

5,000,000  Wells Fargo & Company ...............    289,431      289,375

      Lethargy bordering on sloth remains the cornerstone of our investment style: This year we neither bought nor sold a share of five of our six major holdings.

 

I'd say that portfolio is night and day with the portfolio Pabrai has while he takes naps on the beach.