ZINC - Horsehead Holding Corp

[alwaysinvert]

I don't think you can measure the success of a "value investor" by his long term portfolio compounding track record.

 

You could be fooled by the record of a person who might be a nimble trader and make his money despite not buying things below intrinsic value.  So merely having a good track record along with a self-ascribed "value investor" label is not enough.

 

 

Instead, look up everything he has ever bought for his portfolio.  Recreate his returns as if he'd bought each one of them and held them to the present (never selling), and see how his portfolio returns are under this experiment.  The ultimate test of whether or not he's been a true "value investor" is if the companies have performed in a manner to indicate that he indeed was buying them well below intrinsic value.

 

A confusing contribution to his track record is LEAR, for example.  I think he made a gain on that even though it eventually went to zero.  That's misleading to include in his track record, because he didn't make the gain as a result of buying below intrinsic value, instead he made the gain for being a nimble trader.

 

HNR looks pretty bad.  Then DFC, PNCL, and ZINC and maybe others.

 

I'm just picking on the bad ones.  There must be good ones too that have outperformed.

 

But what's the real record if you measure him based on his ability to identify names trading under intrinsic value?  You know, "you take the good, you take the bad, you take them all and then you have the facts of life?".

 

The industry measures results in a funny way if trading gains (which could just be a case of outstanding spidey senses) can muddy our perceptions of a person's valuation abilities.

 

And for goodness sakes, stop saying "high uncertainty, low risk" -- too many blowups to bear that out.

 

I've seen you make this argument before but it's too simplistic. It's not necessarily a trading skill to sell a company if something material in intrinsic value estimations changes. It would be including spidey senses in intrinsic value to expect sudden value destruction from capital allocation not to be grounds for selling on value factors.

 

I'm not saying it's easy to tease out what you are after currently, but what you are suggesting doesn't solve the problem. Selling can be just as much a value skill as buying and just because you can construct scenarios where it is not doesn't make it invalid to sell in value investing per se.

 

A new CEO going out on a diworsification spree needn't be any more a failure of value than a meteor wiping out headquarters.

 

TL;DR: Why should a wrong valuation in buying count against you and a correct valuation in selling not count for you?   

[ERICOPOLY]

I don't think you can measure the success of a "value investor" by his long term portfolio compounding track record.

 

You could be fooled by the record of a person who might be a nimble trader and make his money despite not buying things below intrinsic value.  So merely having a good track record along with a self-ascribed "value investor" label is not enough.

 

 

Instead, look up everything he has ever bought for his portfolio.  Recreate his returns as if he'd bought each one of them and held them to the present (never selling), and see how his portfolio returns are under this experiment.  The ultimate test of whether or not he's been a true "value investor" is if the companies have performed in a manner to indicate that he indeed was buying them well below intrinsic value.

 

A confusing contribution to his track record is LEAR, for example.  I think he made a gain on that even though it eventually went to zero.  That's misleading to include in his track record, because he didn't make the gain as a result of buying below intrinsic value, instead he made the gain for being a nimble trader.

 

HNR looks pretty bad.  Then DFC, PNCL, and ZINC and maybe others.

 

I'm just picking on the bad ones.  There must be good ones too that have outperformed.

 

But what's the real record if you measure him based on his ability to identify names trading under intrinsic value?  You know, "you take the good, you take the bad, you take them all and then you have the facts of life?".

 

The industry measures results in a funny way if trading gains (which could just be a case of outstanding spidey senses) can muddy our perceptions of a person's valuation abilities.

 

And for goodness sakes, stop saying "high uncertainty, low risk" -- too many blowups to bear that out.

 

I've seen you make this argument before but it's too simplistic. It's not necessarily a trading skill to sell a company if something material in intrinsic value estimations changes. It would be including spidey senses in intrinsic value to expect sudden value destruction from capital allocation not to be grounds for selling on value factors.

 

I'm not saying it's easy to tease out what you are after currently, but what you are suggesting doesn't solve the problem. Selling can be just as much a value skill as buying and just because you can construct scenarios where it is not doesn't make it invalid to sell in value investing per se.

 

A new CEO going out on a diworsification spree needn't be any more a failure of value than a meteor wiping out headquarters.

 

TL;DR: Why should a wrong valuation in buying count against you and a correct valuation in selling not count for you? 

 

 

These businesses he has bought that are going to zero...

 

Were they "low risk" businesses?

 

I am really only picking on him because I am invested with him and I want him to look harder before buying these things (I don't want to lose more money on one of these picks).

 

He goes out on interviews defending his picks as "high uncertainty but low risk".  High uncertainty things swing in price a lot and I think he can/has made money trading these swings.

 

I just want him to drop the "low risk" bit -- I want him to go back and look at everything he's bought and see how they've done if held to the present day.  That's going to force him to reconcile their performance with his "low risk" statement.

 

It's also expressed as "heads I win, tails I don't lose much".  What the fuck, 100% is "much". 

 

Examples of businesses that really are low risk -- JNJ, PG, etc...  Can you hold them for 10 years and not worry whether or not the markets are open for trading?  Yes.  As Buffett says, businesses so simple an idiot can run them, because eventually one will.

 

So yes, you can say it's okay for him to sell when an idiot takes over, but if the business is safe enough for an idiot to run... well then.

 

I would back off if he acknowledged that they have indeed been above average risk and not low risk.  I can't tell if he's fooling himself or not.  He does have the "high uncertainty" part right.

[alwaysinvert]

I don't think you can measure the success of a "value investor" by his long term portfolio compounding track record.

 

You could be fooled by the record of a person who might be a nimble trader and make his money despite not buying things below intrinsic value.  So merely having a good track record along with a self-ascribed "value investor" label is not enough.

 

 

Instead, look up everything he has ever bought for his portfolio.  Recreate his returns as if he'd bought each one of them and held them to the present (never selling), and see how his portfolio returns are under this experiment.  The ultimate test of whether or not he's been a true "value investor" is if the companies have performed in a manner to indicate that he indeed was buying them well below intrinsic value.

 

A confusing contribution to his track record is LEAR, for example.  I think he made a gain on that even though it eventually went to zero.  That's misleading to include in his track record, because he didn't make the gain as a result of buying below intrinsic value, instead he made the gain for being a nimble trader.

 

HNR looks pretty bad.  Then DFC, PNCL, and ZINC and maybe others.

 

I'm just picking on the bad ones.  There must be good ones too that have outperformed.

 

But what's the real record if you measure him based on his ability to identify names trading under intrinsic value?  You know, "you take the good, you take the bad, you take them all and then you have the facts of life?".

 

The industry measures results in a funny way if trading gains (which could just be a case of outstanding spidey senses) can muddy our perceptions of a person's valuation abilities.

 

And for goodness sakes, stop saying "high uncertainty, low risk" -- too many blowups to bear that out.

 

I've seen you make this argument before but it's too simplistic. It's not necessarily a trading skill to sell a company if something material in intrinsic value estimations changes. It would be including spidey senses in intrinsic value to expect sudden value destruction from capital allocation not to be grounds for selling on value factors.

 

I'm not saying it's easy to tease out what you are after currently, but what you are suggesting doesn't solve the problem. Selling can be just as much a value skill as buying and just because you can construct scenarios where it is not doesn't make it invalid to sell in value investing per se.

 

A new CEO going out on a diworsification spree needn't be any more a failure of value than a meteor wiping out headquarters.

 

TL;DR: Why should a wrong valuation in buying count against you and a correct valuation in selling not count for you? 

 

 

These businesses he has bought that are going to zero...

 

Were they "low risk" businesses?

 

I am really only picking on him because I am invested with him and I want him to look harder before buying these things (I don't want to lose more money on one of these picks).

 

He goes out on interviews defending his picks as "high uncertainty but low risk".  High uncertainty things swing in price a lot and I think he can/has made money trading these swings.

 

I just want him to drop the "low risk" bit -- I want him to go back and look at everything he's bought and see how they've done if held to the present day.  That's going to force him to reconcile their performance with his "low risk" statement.

 

It's also expressed as "heads I win, tails I don't lose much".  What the fuck, 100% is "much". 

 

Examples of businesses that really are low risk -- JNJ, PG, etc...  Can you hold them for 10 years and not worry whether or not the markets are open for trading?  Yes.  As Buffett says, businesses so simple an idiot can run them, because eventually one will.

 

So yes, you can say it's okay for him to sell when an idiot takes over, but if the business is safe enough for an idiot to run... well then.

 

I would back off if he acknowledged that they have indeed been above average risk and not low risk.  I can't tell if he's fooling himself or not.  He does have the "high uncertainty" part right.

 

I wasn't making an argument in defense of Pabrai's investments.

[ERICOPOLY]

I don't think you can measure the success of a "value investor" by his long term portfolio compounding track record.

 

You could be fooled by the record of a person who might be a nimble trader and make his money despite not buying things below intrinsic value.  So merely having a good track record along with a self-ascribed "value investor" label is not enough.

 

 

Instead, look up everything he has ever bought for his portfolio.  Recreate his returns as if he'd bought each one of them and held them to the present (never selling), and see how his portfolio returns are under this experiment.  The ultimate test of whether or not he's been a true "value investor" is if the companies have performed in a manner to indicate that he indeed was buying them well below intrinsic value.

 

A confusing contribution to his track record is LEAR, for example.  I think he made a gain on that even though it eventually went to zero.  That's misleading to include in his track record, because he didn't make the gain as a result of buying below intrinsic value, instead he made the gain for being a nimble trader.

 

HNR looks pretty bad.  Then DFC, PNCL, and ZINC and maybe others.

 

I'm just picking on the bad ones.  There must be good ones too that have outperformed.

 

But what's the real record if you measure him based on his ability to identify names trading under intrinsic value?  You know, "you take the good, you take the bad, you take them all and then you have the facts of life?".

 

The industry measures results in a funny way if trading gains (which could just be a case of outstanding spidey senses) can muddy our perceptions of a person's valuation abilities.

 

And for goodness sakes, stop saying "high uncertainty, low risk" -- too many blowups to bear that out.

 

I've seen you make this argument before but it's too simplistic. It's not necessarily a trading skill to sell a company if something material in intrinsic value estimations changes. It would be including spidey senses in intrinsic value to expect sudden value destruction from capital allocation not to be grounds for selling on value factors.

 

I'm not saying it's easy to tease out what you are after currently, but what you are suggesting doesn't solve the problem. Selling can be just as much a value skill as buying and just because you can construct scenarios where it is not doesn't make it invalid to sell in value investing per se.

 

A new CEO going out on a diworsification spree needn't be any more a failure of value than a meteor wiping out headquarters.

 

TL;DR: Why should a wrong valuation in buying count against you and a correct valuation in selling not count for you? 

 

 

These businesses he has bought that are going to zero...

 

Were they "low risk" businesses?

 

I am really only picking on him because I am invested with him and I want him to look harder before buying these things (I don't want to lose more money on one of these picks).

 

He goes out on interviews defending his picks as "high uncertainty but low risk".  High uncertainty things swing in price a lot and I think he can/has made money trading these swings.

 

I just want him to drop the "low risk" bit -- I want him to go back and look at everything he's bought and see how they've done if held to the present day.  That's going to force him to reconcile their performance with his "low risk" statement.

 

It's also expressed as "heads I win, tails I don't lose much".  What the fuck, 100% is "much". 

 

Examples of businesses that really are low risk -- JNJ, PG, etc...  Can you hold them for 10 years and not worry whether or not the markets are open for trading?  Yes.  As Buffett says, businesses so simple an idiot can run them, because eventually one will.

 

So yes, you can say it's okay for him to sell when an idiot takes over, but if the business is safe enough for an idiot to run... well then.

 

I would back off if he acknowledged that they have indeed been above average risk and not low risk.  I can't tell if he's fooling himself or not.  He does have the "high uncertainty" part right.

 

I wasn't making an argument in defense of Pabrai's investments.

 

I do understand the difference in argument that you are making.

 

An example is Buffett exiting his GSE investment.

 

Regardless, the intrinsic value is all future distributable cash flows discounted to the present.  I'd like to see if people are really buying things below intrinsic value or if it's an industry wide delusion.  It still might be a profitable approach because it seems safer than seeking out the most seemingly expensive things, but as an intellectual exercise I'd be interest in knowing which "value investors" are really not buying (on the whole) below intrinsic value.

 

I believe Buffett recognizes my argument, and he has adjusted for it by trying to seek out only the most enduring businesses that an idiot can run.  I think that's his reasoning for doing so -- because he's like a monk about this intrinsic value stuff and has honed his approach to increase the certainty that he doesn't make a mistake assessing IV. 

 

 

[alwaysinvert]

I do understand the difference in argument that you are making.

 

An example is Buffett exiting his GSE investment.

 

Regardless, the intrinsic value is all future distributable cash flows discounted to the present.  I'd like to see if people are really buying things below intrinsic value or if it's an industry wide delusion.  It still might be a profitable approach because it seems safer than seeking out the most seemingly expensive things, but as an intellectual exercise I'd be interest in knowing which "value investors" are really not buying (on the whole) below intrinsic value.

 

I believe Buffett recognizes my argument, and he has adjusted for it by trying to seek out only the most enduring businesses that an idiot can run.  I think that's his reasoning for doing so -- because he's like a monk about this intrinsic value stuff and has honed his approach to increase the certainty that he doesn't make a mistake assessing IV.

 

I think you are probably right; it is an industry wide delusion. Of course two things can be true at the same time. There can still be some people who are capable. I don't think there's any disagreement on this.

 

If we are talking about ZINC, it's entirely possible that Pabrai was correct when he first bought and his actual mistake was not selling when things about Mooresboro started to unravel, or even when they made the decision to invest in the facility. This could be unknowable and I don't know enough about the company to comment on this anyhow.

 

But say I bought BRK in 1980 and sold yesterday because I thought it was too dear. Tomorrow Buffett dies and on Monday Wechsler takes over and starts buying billions of derivatives which later go belly-up, wiping out the shareholders. What's left for shareholders since 1980? Exactly $0, because BRK never paid dividends.

 

I don't think that makes my sale of the stock a skilled timing trade. Is this then a question of estimating intrinsic value incorrectly? Well, the events that wiped the shareholders all took place after I sold the stock, so how could it be? The undervaluation clearly was there because I never owned an entity in which the value was destroyed. In fact, I may still have sold incorrectly. After all, BRK is at a historically low p/b today and I don't know now that Weschler is going to go Dick Fuld on the place.

 

In short, for our purposes the distinction between actual DCF and best estimation of future DCF is meaningless.

[AzCactus]

I think the other issue at play here is position sizing.  I think in an interview Buffett once said that his biggest lost relative to assets was about 2%.  I don't know the exact number on zinc but I know it was much more than that.  The other issue I see with zinc specifically is that the company has consistently over promised and under delivered.  Reading pabrais letter and hearing him say anything good about the CEO was a bit startling given the end result. 

[Picasso]

I mentioned this before but I think this latest episode speaks poorly to his maturity as an investor.  Less than six months ago he buys more ZINC at $7 or so and today it is effectively at zero and it's game over.  Turns out the heart of this thesis turned into two speculations when he added to the position: zinc going up and the plant getting up to capacity quickly.  Instead of saying "yeah when we first bought this it was a different situation, we made a mistake by speculating on factors outside anyones control by holding this after 2014, etc" he says "our mistake was owning more than 4.9% of a stock."  No that wasn't the mistake here because you just added. 

 

Then he has over 40% of the fund in Fiat (at one point before it dropped in price/RACE spin) and another 15% in GM warrants.  He is so freaking lucky the VW emission scandal wasn't a Fiat or GM emission scandal.  Let's say Fiat or GM gets hit hard, what is going to be the excuse?  "Next time we won't put more than 10% of the fund in any one industry?"  It's like he has to learn the lessons the hard way every time.  Not only is owning GM not enough he has to put a lot of capital in the warrants where time is no longer on his side.  Is the next mea culpa going to be "next time we wont own warrants, been there done that got the t-shirt?"

 

His excuse with Sears was that he suddenly realized Sears couldn't just fire 100,000 people.  Again, that's not what made Sears a bad investment but it sounds like a nice revelation to have before deciding to cut your losses. 

 

Then there is the fact that he has his golden years of performance all over the internet but on multiple occasions he asks people not to mention his performance when it's not that great. 

 

Anyway just frustrating to see.  I hope Pabrai does well and sincerely hope that no one backs up the truck on this stock at $0.60.  Hopefully that Pabrai letter makes it clear that this stock isn't something to speculate on anymore.  And hopefully Pabrai develops a better risk management process. 

[original mungerville]

Fair enough walt373.

 

On Pabrai letter, woaw. I totally own my decision to hold this stock but pabrai is definitely not the man he claims to be. How many times are you going to change your rules on position sizing bro? I don't think he is an honest man, sorry.

 

I am very interested in what changes he made to his rules on position sizing.

 

He was 10 x 10 positions pre-financial crisis. Then he moved to 2% (asymmetric), 5%, and 10% (more sure, high conviction).

 

What has he said now about position sizing changes?

[RadMan24]

Well. Can the company receive liquidity to get the plant operational, and not to wipe out all of the equity? It's only $40 million. I think it's still possible. And if they can get operational, the value of the company can be replenished. Sure it is a big if, given the current stake of the markets. But it's not doomed like coal companies, and over leveraged E&P who have assets that are depleted.

[alertmeipp]

I think the outcome of the equity will be largely driven by how shareholder friendly the management really is and how the plant retrofit is really progressing.

 

 

[widenthemoat]

Fair enough walt373.

 

On Pabrai letter, woaw. I totally own my decision to hold this stock but pabrai is definitely not the man he claims to be. How many times are you going to change your rules on position sizing bro? I don't think he is an honest man, sorry.

 

I am very interested in what changes he made to his rules on position sizing.

 

He was 10 x 10 positions pre-financial crisis. Then he moved to 2% (asymmetric), 5%, and 10% (more sure, high conviction).

 

What has he said now about position sizing changes?

 

I think what Pabrai meant in his letter related to percentage ownership of a company...not necessarily position sizing. He essentially said he did not want to own more than 4.9% of a company due to the disclosure requirements...not anything to do with how he will be sizing his position in the future (although if the company is small I guess this would effect his position sizing as well). An example would be Pabrai putting 50% of portfolio assets in BRK. This would be a massive 50% position for his portfolio but he would not own 5% of BRK and would not have any increased disclosure requirements from this position. Thats the way I interpreted it at least.

[Vish_ram]

One should be very careful reading into an investors returns, putting that investor in a pedestal and cloning them blindly.

 

Say a value investor setup his/her firm in 2000 and with smaller AUM (say < 50MM) greatly outperformed major indices in first 2 years. Assume, after 3rd year, for next 12-13 years, they slightly under performed major indices. Any investor blindly putting in QQQ or SPY and reinvesting dividends would have done better after year 3.

 

Now if that value investor computed annualized returns from day 1 (from year 2000), he/she'll show awesome returns. In fact all their brochures, marketing ppt will show returns for $1 invested on day 1. If you shifted it 3 years forward, and compounded $1 from year 4-current, the returns will be much worse.

 

PS

The above mentioned investor is none other than MP. Anyone who invested in his fund starting Jan-2004 would have under performed major indices.

[thekiefs]

Well. Can the company receive liquidity to get the plant operational, and not to wipe out all of the equity? It's only $40 million. I think it's still possible. And if they can get operational, the value of the company can be replenished. Sure it is a big if, given the current stake of the markets. But it's not doomed like coal companies, and over leveraged E&P who have assets that are depleted.

 

This is what I don't understand. A few months ago we were talking about liquidity issues not being a problem until 6 to 12 months out, an estimate not including a subsidiary sale and not including the ATM. We were talking about all the options they have, one of them which includes negotiating with the creditors to possibly delay the payment until management can figure out how to properly engineer up this hell-hole of a plant.

 

I haven't crunched the numbers since then, but the big news here is they missed a coupon grace period. Is there any reason for missing a coupon payment other than as a strategy for those negotiations? In the posts quoting management since the missed coupon, they seem pretty coy. I know they've lost complete credibility with investors, but why do we believe they've suddenly run out of liquidity? Is the plant just hopeless?

 

+1 to Parsad's post.

[racemize]

One should be very careful reading into an investors returns, putting that investor in a pedestal and cloning them blindly.

 

Say a value investor setup his/her firm in 2000 and with smaller AUM (say < 50MM) greatly outperformed major indices in first 2 years. Assume, after 3rd year, for next 12-13 years, they slightly under performed major indices. Any investor blindly putting in QQQ or SPY and reinvesting dividends would have done better after year 3.

 

Now if that value investor computed annualized returns from day 1 (from year 2000), he/she'll show awesome returns. In fact all their brochures, marketing ppt will show returns for $1 invested on day 1. If you shifted it 3 years forward, and compounded $1 from year 4-current, the returns will be much worse.

 

PS

The above mentioned investor is none other than MP.

 

That's not quite fair.  Though a lot of the outperformance did come from the first years, and the last 3-5 have not been great, PIF3 is outperforming by 3% annually and it started later.  He's also comparing to the best index of three rather than just the S&P500.

[DTEJD1997]

Well. Can the company receive liquidity to get the plant operational, and not to wipe out all of the equity? It's only $40 million. I think it's still possible. And if they can get operational, the value of the company can be replenished. Sure it is a big if, given the current stake of the markets. But it's not doomed like coal companies, and over leveraged E&P who have assets that are depleted.

 

This is what I don't understand. A few months ago we were talking about liquidity issues not being a problem until 6 to 12 months out, an estimate not including a subsidiary sale and not including the ATM. We were talking about all the options they have, one of them which includes negotiating with the creditors to possibly delay the payment until management can figure out how to properly engineer up this hell-hole of a plant.

 

I haven't crunched the numbers since then, but the big news here is they missed a coupon grace period. Is there any reason for missing a coupon payment other than as a strategy for those negotiations? In the posts quoting management since the missed coupon, they seem pretty coy. I know they've lost complete credibility with investors, but why do we believe they've suddenly run out of liquidity? Is the plant just hopeless?

 

+1 to Parsad's post.

 

I don't have a position in this, but I've been following it closely, as I've got a Zinc position.

 

I am wondering if the plant is currently producing AT IT'S PEAK.

 

Something is very seriously wrong here.  Could it perhaps be the design of the plant.  That no matter what amount of work is done reworking it, it is producing close to as much as it is going to ever produce?

 

I also think it might be getting to the point where management has spent SO much time/capital reworking it, they simply could built yet another WHOLE plant...

[Vish_ram]

You didn't read my post carefully. PIF3's out performance is due to first two years. Compute anything starting Jan-2004. Even PIF2&3's new investors starting Jan-04 would have under performed indices. AUM starting Jan-04 is ~$50MM. So the under performance is for last 12 years with AUM > $50MM.

 

And you are making the same mistake that I cautioned against. Looking into alpha for compounding from day 1 can be misleading.

 

One should be very careful reading into an investors returns, putting that investor in a pedestal and cloning them blindly.

 

Say a value investor setup his/her firm in 2000 and with smaller AUM (say < 50MM) greatly outperformed major indices in first 2 years. Assume, after 3rd year, for next 12-13 years, they slightly under performed major indices. Any investor blindly putting in QQQ or SPY and reinvesting dividends would have done better after year 3.

 

Now if that value investor computed annualized returns from day 1 (from year 2000), he/she'll show awesome returns. In fact all their brochures, marketing ppt will show returns for $1 invested on day 1. If you shifted it 3 years forward, and compounded $1 from year 4-current, the returns will be much worse.

 

PS

The above mentioned investor is none other than MP.

 

That's not quite fair.  Though a lot of the outperformance did come from the first years, and the last 3-5 have not been great, PIF3 is outperforming by 3% annually and it started later.  He's also comparing to the best index of three rather than just the S&P500.

[Txvestor]

The main issues here in my view are:

1) Zinc was not a profitable company and clearly this was not a bet on profits/fcf with durable moats etc. so arguably this was never something a value investor should be involved in anyway.

2) This was always a bet on an investment thesis based on a) certain commodity assumptions b) certain engineering/plant assumptions c) a certain amount of confidence in managements execution strategy and ability.

Quite clearly independent thinking would have put this investment in the too hard pile and one would not have gone for it. As it is obvious atleast in retrospect that there were too many things that could go wrong.

For many(including me) on this board, that an investor like Pabrai was neck deep in it proved too alluring and perhaps we did not listen to that inner voice as much as we should have. I resisted investing in it as it went all the way up to 20, despite all the hype, but on the way down thought it fit to take a small 2.5% position. Then the dramatic decline in recent weeks was an absolutely astonishing crash to reality.

Even when cloning you must clone with some independent thinking. If any investment thesis makes you a little uncomfortable, its better to pass than risk loss of capital.

The reasons this went south is a convergence of negatives. The commodity crash, a quite clearly incompetent and arguably ethically challenged management, a disastrous start up to the new plant, and poor transitional financial planning considering all of the above.

 

[racemize]

You didn't read my post carefully. PIF3's out performance is due to first two years. Compute anything starting Jan-2004. Even PIF2&3's new investors starting Jan-04 would have under performed indices. AUM starting Jan-04 is ~$50MM. So the under performance is for last 12 years with AUM > $50MM.

 

And you are making the same mistake that I cautioned against. Looking into alpha for compounding from day 1 can be misleading.

 

 

Wow, that seems a bit insulting.  I was not making that mistake.  Let's go ahead and get into the details I guess.  First off, you just switched to Pif3, even though Pif1 was the earliest fund and clearly the one you were originally referring to, since you said "2000". 

 

As you know, he started Pif1/2 first, earlier than Pif3.  I was applying your argument to Pabrai's fund career (and which doesn't include the outperformance he had prior to starting the fund).  Anyway, since you are saying I didn't read your argument, but didn't specify Pif3, let's go ahead and use it against his fund career returns, which would be what a reader would assume.  Pif1/2 was started in 1999.  Pif3 was started in 2002 and underperformed in its first year.  So, let's use your exact words for Pif1:

 

Assume, after 3rd year, for next 12-13 years, they slightly under performed major indices. Any investor blindly putting in QQQ or SPY and reinvesting dividends would have done better after year 3.

 

1999+2 is 2001, and Pif3 was started in 2002.  Even then, he underperformed in that year, so he didn't have a good first year for that fund.  Pif3 shows outperformance since inception.  Thus, Pif1/2 outperformance is not explained solely by the first 2 years of performance, as you assert, since Pif3 outperformed and only showed positive performance starting in 2003.  Thus, your exact wording was not fair to his results, as I stated.

 

Moreover, let's look at some more data:

In 2006 and 2007 Pabrai beat the market in 1, 3, and 5 year categories, showing positive results after 2004. 

In 2008, he got hammered, but still showed outperformance in the 5 year category.

In 2011, he was back to outperforming in 1, 3 years and 5 years was about flat, showing positive results after 2004

In 2014, the 5 year was showing outperformance, showing positive results after 2004

In 2015, the 5 year was showing outperformance, showing positive results after 2004

 

I'm assuming that you are resting your assumptions based on PIF4, which was started in 2003 and isn't performing better on all metrics against NASDAQ.  I agree, it isn't great, but it does represent deviations from Pif2 and Pif3 results, mentioned above.

 

Moreover, let's take a different scenario.  Let's take an investor who generates lumpy returns that are say 3% better than the market over time.  Now let's through some lumps in (e.g., 2008) and measure his performance using an endpoint when almost all value investors are underperforming the market.  Let's say in two years he creams the market.  Different outcome no? 

[randomep]

 

 

Assume, after 3rd year, for next 12-13 years, they slightly under performed major indices. Any investor blindly putting in QQQ or SPY and reinvesting dividends would have done better after year 3.

 

1999+2 is 2001, and Pif3 was started in 2002.  Even then, he underperformed in that year, so he didn't have a good first year for that fund.  Pif3 shows outperformance since inception.  Thus, Pif1/2 outperformance is not explained solely by the first 2 years of performance, as you assert, since Pif3 outperformed and only showed positive performance starting in 2003.  Thus, your exact wording was not fair to his results, as I stated.

 

Moreover, let's look at some more data:

In 2006 and 2007 Pabrai beat the market in 1, 3, and 5 year categories, showing positive results after 2004. 

In 2008, he got hammered, but still showed outperformance in the 5 year category.

In 2011, he was back to outperforming in 1, 3 years and 5 years was about flat, showing positive results after 2004

In 2014, the 5 year was showing outperformance, showing positive results after 2004

In 2015, the 5 year was showing outperformance, showing positive results after 2004

 

I'm assuming that you are resting your assumptions based on PIF4, which was started in 2003 and isn't performing better on all metrics against NASDAQ.  I agree, it isn't great, but it does represent deviations from Pif2 and Pif3 results, mentioned above.

 

Moreover, let's take a different scenario.  Let's take an investor who generates lumpy returns that are say 3% better than the market over time.  Now let's through some lumps in (e.g., 2008) and measure his performance using an endpoint when almost all value investors are underperforming the market.  Let's say in two years he creams the market.  Different outcome no?

 

I have a big problem with your analysis racemize. You above pointed to 5 periods of times and explained Pabrai performance.  The 2nd one you acknowledge this 2008 underperformance and in the 3rd one you mentioned a 5 year trailing return which included 2008. All the other ones skipped 2008. It reminds me of greenspan's comment, deregulation worked in all years except 2008. If Pabrai runs a hedge fund, then I would expect it to zig when markets zag and vice versa. What the results demonstrate is that he is make big bets with tons of risk. Bets tend to pay off in bull markets of course. And his comments have confirmed that. He says he buys investments to triple or quadruple his money in 2-3 years.  But they can easily backfire as in ZINC.

 

Hedge funds take big money, Pabrai wants minimum investments in the millions, but if that's your life savings do you want Pabrai to bet 50% on FCAU? FCAU is just one emissions or safety scandal away from dropping in half.  To me the way he invests the amount of money he controls is just reckless.

 

[Vish_ram]

Racemice

 

Good arguments, I didn't mean to be insulting and apologize if you thought so.

 

I did more analysis. Any investor who started with MP in 04, 05, 06, 07, 08, 10, 11 lost to S&P. they lost it bigger compared to Nasdaq. See the attachment below. The only period who outperformed S&P was that investor in year 09 (after the big blood bath), and maybe 2013. I can say with reasonable confidence that majority of investors who invested after Jan-2004 and never pulled it out would have under performed the indices.

 

So looking at annualized compounded from day 1 leads to misleading interpretation as most of investors may not have enjoyed those.

 

 

[racemize]

I'm not defending his performance or the way he invests.  I am not comfortable with his position sizing right now either.  He is by far the most volatile investor I've seen--I did an analysis of whether people would do better if they held cash or not, and he was the only one who the answer came up "yes" for (on two of the funds) because of the huge amount of volatility he has. 

 

I was addressing whether or not all of his outperformance came from the first two years of performance as asserted.  It did not.  A lot of his performance came from the first four years or so.  But he showed 5 year outperformance over numerous different periods since those first four years. 

 

Generally, I am suggesting that endpoints matter a lot.  If he continues to underperform over the next 2-3 years, then that will be one thing; however, if he shows large outperformance again (which, given his record, is quite possible, as he has large positive and negative years), then the story will be quite different.  There's a lot of value guys doing quite poorly on 1, 3, and 5 year records right now--have they all lost their touch?  Or perhaps there is something strange about the market right now.

 

 

[randomep]

One more thing, can some of you guys get off your f**king high horse and stop the back-door posts insinuating that my friendship with Mohnish blinds me to his errors in judgement.

 

He's not a God!  He's made mistakes before...anyone remember 2007/2008?  He's human like all of us and he will make good and bad investment decisions, no matter how you or he chooses to frame it.  It is what it is!  He's a very smart guy, who will get most of his decisions right, and some will go bad...simple!

 

I didn't copy his investment in Fiat, GM, et al like so many others on here, who are now crying foul because they jumped into ZINC and lost a bundle!  I don't have a god-damn checklist, I don't clone, I don't have the nicest Swiss sidekick that any portfolio manager could want, and I have yet to ride a bike in tights!  That's what you actual zealots do and then turn on the guy when he f**ks up!  He's my friend...I don't kiss his ass!

 

And why is it that I don't do these things?  Because I've always thought independently, just like I've always run this message board independently.  Everything I've done, I've done from the grassroots up...the hard way...independent...whether it was Corner of Berkshire & Fairfax, Corner Market Capital or now Premier.  No "family money/office" as some of you guys suggest you are starting with, no huge windfall from a benefactor, no notoriety from an ex-employer...from scratch, the hard way, learning every facet of each business along the way, and making sacrifice after sacrifice. 

 

Maybe, I'm getting older, maybe I'm fed up with the bull-shit because I don't have to take it any more, but if you don't f**king like how I run the message board, then bugger off!  I don't sugar coat for anyone...whether it was Sardar, Mohnish, Prem, Buffett, whoever.  I'd be doing a disservice to everyone, including myself, if I did that!  Cheers!

 

I also think we should all know that Pabrai has been very quick to demand people take down his letters on any website. I am sure if the post stayed up any longer Prasad would've heard from Pabrai, and Prasad knows that.

 

 

[racemize]

Racemice

 

Good arguments, I didn't mean to be insulting and apologize if you thought so.

 

I did more analysis. Any investor who started with MP in 04, 05, 06, 07, 08, 10, 11 lost to S&P. they lost it bigger compared to Nasdaq. See the attachment below. The only period who outperformed S&P was that investor in year 09 (after the big blood bath), and maybe 2013. I can say with reasonable confidence that majority of investors who invested after Jan-2004 and never pulled it out would have under performed the indices.

 

So looking at annualized compounded from day 1 leads to misleading interpretation as most of investors may not have enjoyed those.

 

Yes, I think that just lines up with the data from Pif4, which again is not great.  Other than quibbling with the 2 year comment, what I was trying to point out is that at various times he did outperform over 5 year periods.  Because of his volatility, the endpoints matter a lot, and we are measuring him at a point that is quite bad for him and other value investors.  Of course, I can't tell you that it means that he will show outperformance going forward or not--I'm guessing that in a few years the record will look better.  If not, then he isn't adding much value. 

 

Again, most value shops aren't looking pretty, so some of my reasoning is that 1) value investing still works and 2) that will show up in the next few years and revalidate the alpha of many managers.

 

Edit: Also, I do agree that most of the outperformance was from the beginning, so I'm not disagreeing with the general idea of your post.  It is certainly useful for those that weren't aware of the particular path of his returns.

[jschembs]

One more thing, can some of you guys get off your f**king high horse and stop the back-door posts insinuating that my friendship with Mohnish blinds me to his errors in judgement.

 

He's not a God!  He's made mistakes before...anyone remember 2007/2008?  He's human like all of us and he will make good and bad investment decisions, no matter how you or he chooses to frame it.  It is what it is!  He's a very smart guy, who will get most of his decisions right, and some will go bad...simple!

 

I didn't copy his investment in Fiat, GM, et al like so many others on here, who are now crying foul because they jumped into ZINC and lost a bundle!  I don't have a god-damn checklist, I don't clone, I don't have the nicest Swiss sidekick that any portfolio manager could want, and I have yet to ride a bike in tights!  That's what you actual zealots do and then turn on the guy when he f**ks up!  He's my friend...I don't kiss his ass!

 

And why is it that I don't do these things?  Because I've always thought independently, just like I've always run this message board independently.  Everything I've done, I've done from the grassroots up...the hard way...independent...whether it was Corner of Berkshire & Fairfax, Corner Market Capital or now Premier.  No "family money/office" as some of you guys suggest you are starting with, no huge windfall from a benefactor, no notoriety from an ex-employer...from scratch, the hard way, learning every facet of each business along the way, and making sacrifice after sacrifice. 

 

Maybe, I'm getting older, maybe I'm fed up with the bull-shit because I don't have to take it any more, but if you don't f**king like how I run the message board, then bugger off!  I don't sugar coat for anyone...whether it was Sardar, Mohnish, Prem, Buffett, whoever.  I'd be doing a disservice to everyone, including myself, if I did that!  Cheers!

 

Very well said, thanks!

[zenith]

i have responded to everyone who sent me a PM, if not let me know and due to the number of requests I will be sending them out later so I can send one email!

 

On a related note, i think one thing is clear, leveraged companies are always a bet on timing, and every seven years or so we have some crisis (2000 tech, 2007 financial, 2014 commodity). A company with little or no debt and generating CFO, I can see with a larger position sizing. Even Carl Icahn has taken some lumps, and no one knows the outcome of FCX, CHK etc. the difference I believe lies in his ability with say CHK, to do a debt swap, as well as join the board, etc. He as an activist investor can make things happen even when they look bleak. or take Longleaf and Mason hawkins on the passive side (they prefer to NOT get involved unless they are forced to), he once noted that in 20 out of 24 times he was able to extract value by getting involved, etc. the one large success, LVLT, and the failure (they lost some) was DELL with a take under. I think the one rule that Pabrai should change is his not getting involved. I believe that as a successful business person like Pabrai who sold his company for a nice sum could add value and perhaps salvage a portion if not all of his investment.

 

I would love to hear others thoughts on this, as i understand many may not agree.