Dhandho Holdings!

[Partner24]

Guys, please don't get overexcited. I want to buy the shares at a fair price .

 

So this project is gonna be a mess ok?  ;)

[Parsad]

Guys, please don't get overexcited. I want to buy the shares at a fair price .

 

So this project is gonna be a mess ok?  ;)

 

I'm sure you will at some point, like with any other business.  But think about how well read Mohnish is, and how well-connected he is at this point in time.  I would dare say, there are probably a number of private businesses that he could easily approach, that are well off anyone's radar.  That large frontal lobe of his has amassed a pretty good base of knowledge about the various public and private companies out there!  ;D  Cheers!

[crastogi]

Good luck to Mohnish.  It is hard to find insurance companies that have consistent underwriting profitability AND are growing float and revenues.  I guess the existing owners may be looking to squeeze better returns from the float.  I am sure Pabrai has no desire to run the operations

 

Prasad - do you know if Pabrai is past his hurdles and charging fees now (finally)?

 

 

[Parsad]

Good luck to Mohnish.  It is hard to find insurance companies that have consistent underwriting profitability AND are growing float and revenues.  I guess the existing owners may be looking to squeeze better returns from the float.  I am sure Pabrai has no desire to run the operations

 

Prasad - do you know if Pabrai is past his hurdles and charging fees now (finally)?

 

Yup.  I believe one of the funds paid incentive fees in the 4th quarter, and so far in January, it looks like the two other funds will also be paying incentive fees according to the letter.  Cheers!

[Palantir]

Will PabraiCo be publicly listed?

[shalab]

I have an inkling that if that Vice Chairman title has anyone on it

 

I am thinking Sanjeev or Alnesh...

[Parsad]

I have an inkling that if that Vice Chairman title has anyone on it

 

I am thinking Sanjeev or Alnesh...

 

Nooo!  Mohnish thinks of me more as a little brother...literally...there's a foot difference in our height!  ;D 

 

Guy is his sounding board and equal!  Cheers! 

[Guest wellmont]

is this a clever way to sell more books?  ;D

[OracleofCarolina]

is this a clever way to sell more books?  ;D

 

and Dhando Holdings t-shirts!

[jwfm1985]

Hey Sanjeev quick question - if they do end up closing, will they plan on doing a private placement for the deal? Do you know if it's it only open to current Pabrai Fund investors? Thanks!

[muscleman]

Will PabraiCo be publicly listed?

 

I was gonna ask the same question.

But the other question I have is that Pabrai may have to change his strategies if he were to invest the float like Buffet. In from 2008 to 2009, he had 65% mark to market loss at one point, which I believe is more than sufficient to wipe out an insurance company.

But if he invests like MKL, and only use 50-70% of float to buy stocks, I think it will be fine.

Thoughts?

How did Buffet invest so much into equity and not worried to be wiped out by MTM losses?

[petey2720]

Hi Guys -

 

So far nobody has mentioned that Mohnish achieved between 46-50% return for 2013 after fees for his investors among his various funds.  Well done!!!

 

Secondly, last year was the first time he earned a performance fee since 2007.  That means that any new money into his funds after 2007 got a free ride (admittedly a bumpy one) for 6 years.  The high water mark kept increasing by 6% every year.  He did not even attempt or consider changing the compensation structure during this time.

 

I guess my point is that with Mohnish, I would not worry about the compensation structure at this new insurance company.  I think he has earned our trust. 

 

Also, by my reading of the letter, this new insurance company in not just for the Pabrai Fund investors.  I think he is looking for like minded investors and the minimum is $1.0m by February 28th and $2.0m between Feb 28th and the end of April.

 

One more thing, I don't think that Mohnish is going to be directly involved in the underwriting, but will be taking over the investment management of the float.  I think there is a good underwriting team in place and he is smart enough to leave that alone.

[stahleyp]

Pabrai has cloned the ethics of "Buffett & Munger" - not an easy thing to do. A+ to him on that count.

 

+1

 

I'm looking forward to this and anything that Sanj has up his sleeve, too.

[Parsad]

Will PabraiCo be publicly listed?

 

Dhandho Holdings will be listed after the initial financing is closed on the Nasdaq or OTC.  An IPO for $100M will then be undertaken in 2015, where Pabrai Funds will put in $70M.

 

Hey Sanjeev quick question - if they do end up closing, will they plan on doing a private placement for the deal? Do you know if it's it only open to current Pabrai Fund investors? Thanks!

 

After the initial 99 slots are filled for the financing, where he could raise a minimum of $35M to $150M...I think it will on the higher side...the partnership will become a listed company once the insurance acquisition is complete and they will then do an IPO.  Pabrai Funds, as mentioned above, will invest $70M in the IPO, thus investors in Pabrai Funds will have exposure without having to participate in the initial financing.

 

Hi Guys -

 

So far nobody has mentioned that Mohnish achieved between 46-50% return for 2013 after fees for his investors among his various funds.  Well done!!!

 

Secondly, last year was the first time he earned a performance fee since 2007.  That means that any new money into his funds after 2007 got a free ride (admittedly a bumpy one) for 6 years.  The high water mark kept increasing by 6% every year.  He did not even attempt or consider changing the compensation structure during this time.

 

I guess my point is that with Mohnish, I would not worry about the compensation structure at this new insurance company.  I think he has earned our trust. 

 

Also, by my reading of the letter, this new insurance company in not just for the Pabrai Fund investors.  I think he is looking for like minded investors and the minimum is $1.0m by February 28th and $2.0m between Feb 28th and the end of April.

 

One more thing, I don't think that Mohnish is going to be directly involved in the underwriting, but will be taking over the investment management of the float.  I think there is a good underwriting team in place and he is smart enough to leave that alone.

 

Compensation is interesting too for the initial LP!  I just did a quick read, so if anyone sees anything different, feel free to correct.

 

There will be a 1% fee, through which all operating costs will be run.  Investors receive 100% of distributions until it equals their capital accounts...in other words, no incentive fee until he doubles your money.  Then after that, the distributions will be 90/10 to LP/GP with no hurdle.  If you run the numbers it seems to fall in around 9% hurdle with 25% incentive fee, only after he's doubled your capital account.  Not sure how that changes once it is listed as a company and after the IPO.  Cheers!

[ERICOPOLY]

But the other question I have is that Pabrai may have to change his strategies if he were to invest the float like Buffet. In from 2008 to 2009, he had 65% mark to market loss at one point, which I believe is more than sufficient to wipe out an insurance company.

But if he invests like MKL, and only use 50-70% of float to buy stocks, I think it will be fine.

Thoughts?

How did Buffet invest so much into equity and not worried to be wiped out by MTM losses?

 

 

Let's say you just have an insurance company and nothing else in your holding company -- you'd better be pretty damn cautious about MTM losses on equities.

 

Now, instead suppose you also have a few very high quality (and wholly owned) companies surrounding it -- companies that just throw off tons of cash....

 

Two things just happened by adding the very high quality wholly owned cash machines:

1)  insurance ratings went up on the insurer, ultimately leading to better underwriting results (charge more for higher ratings)

2)  You can invest the float a bit more aggressively given the huge amounts of earnings power across the consolidated entity

 

I believe the insurance businesses within Berkshire would earn lower ROE as entities outside of Berkshire.  The structure boosts intrinsic value.

 

Similarly, I think an aircraft carrier is better off travelling in a convoy of destroyers.  Buffett is playing a little game of fleet admiral here.

[twacowfca]

But the other question I have is that Pabrai may have to change his strategies if he were to invest the float like Buffet. In from 2008 to 2009, he had 65% mark to market loss at one point, which I believe is more than sufficient to wipe out an insurance company.

But if he invests like MKL, and only use 50-70% of float to buy stocks, I think it will be fine.

Thoughts?

How did Buffet invest so much into equity and not worried to be wiped out by MTM losses?

 

 

Let's say you just have an insurance company and nothing else in your holding company -- you'd better be pretty damn cautious about MTM losses on equities.

 

Now, instead suppose you also have a few very high quality (and wholly owned) companies surrounding it -- companies that just throw off tons of cash....

 

Two things just happened by adding the very high quality wholly owned cash machines:

1)  insurance ratings went up on the insurer, ultimately leading to better underwriting results (charge more for higher ratings)

2)  You can invest the float a bit more aggressively given the huge amounts of earnings power across the consolidated entity

 

I believe the insurance businesses within Berkshire would earn lower ROE as entities outside of Berkshire.  The structure boosts intrinsic value.

 

Similarly, I think an aircraft carrier is better off travelling in a convoy of destroyers.  Buffett is playing a little game of fleet admiral here.

 

That's a very good perspective, Eric.

 

Warren had squeezed cash from BRK to buy NICO which meant that a company with lousy returns was joined to a controlled insurer with a huge pile of cash and marketable securities. BRK's ownership of NICO gave Warren optionality; if NICO had got in trouble with high intrinsic value but low market value equity holdings on its BS Warren could have squeezed or even liquidated BRK with its remaining working capital to provide relief to NICO.

 

Things weren't all rosie.  Warren's investments were such a spiderweb of cross holdings that the SEC took interest and was about to bring suit around that time.

 

I think the key reason he took the plunge into investing almost all NICO's assets in equities was that equity holdings of insurance companies didn't have to be marked to market then.  If his regulator questioned those holdings which were likely carried at purchase price, Warren could have pointed to how solid the underlying businesses were.  NICO had been a homegrown Omaha success.  I suspect that the regulator of that local business was not unfriendly or activist.  :)

[muscleman]

But the other question I have is that Pabrai may have to change his strategies if he were to invest the float like Buffet. In from 2008 to 2009, he had 65% mark to market loss at one point, which I believe is more than sufficient to wipe out an insurance company.

But if he invests like MKL, and only use 50-70% of float to buy stocks, I think it will be fine.

Thoughts?

How did Buffet invest so much into equity and not worried to be wiped out by MTM losses?

 

 

Let's say you just have an insurance company and nothing else in your holding company -- you'd better be pretty damn cautious about MTM losses on equities.

 

Now, instead suppose you also have a few very high quality (and wholly owned) companies surrounding it -- companies that just throw off tons of cash....

 

Two things just happened by adding the very high quality wholly owned cash machines:

1)  insurance ratings went up on the insurer, ultimately leading to better underwriting results (charge more for higher ratings)

2)  You can invest the float a bit more aggressively given the huge amounts of earnings power across the consolidated entity

 

I believe the insurance businesses within Berkshire would earn lower ROE as entities outside of Berkshire.  The structure boosts intrinsic value.

 

Similarly, I think an aircraft carrier is better off travelling in a convoy of destroyers.  Buffett is playing a little game of fleet admiral here.

 

So if the insurance float is used to buy stocks, they need to be MTM, but if the float is used to buyout a company, then it is no longer needed to MTM, because there is no market to mark to, am I right?

In this case, I think it is much less risky.

[ERICOPOLY]

But the other question I have is that Pabrai may have to change his strategies if he were to invest the float like Buffet. In from 2008 to 2009, he had 65% mark to market loss at one point, which I believe is more than sufficient to wipe out an insurance company.

But if he invests like MKL, and only use 50-70% of float to buy stocks, I think it will be fine.

Thoughts?

How did Buffet invest so much into equity and not worried to be wiped out by MTM losses?

 

 

Let's say you just have an insurance company and nothing else in your holding company -- you'd better be pretty damn cautious about MTM losses on equities.

 

Now, instead suppose you also have a few very high quality (and wholly owned) companies surrounding it -- companies that just throw off tons of cash....

 

Two things just happened by adding the very high quality wholly owned cash machines:

1)  insurance ratings went up on the insurer, ultimately leading to better underwriting results (charge more for higher ratings)

2)  You can invest the float a bit more aggressively given the huge amounts of earnings power across the consolidated entity

 

I believe the insurance businesses within Berkshire would earn lower ROE as entities outside of Berkshire.  The structure boosts intrinsic value.

 

Similarly, I think an aircraft carrier is better off travelling in a convoy of destroyers.  Buffett is playing a little game of fleet admiral here.

 

So if the insurance float is used to buy stocks, they need to be MTM, but if the float is used to buyout a company, then it is no longer needed to MTM, because there is no market to mark to, am I right?

In this case, I think it is much less risky.

 

His insurance float is not invested in wholly owned businesses.  His float is invested in fighter planes parked on his carriers.  He can comfortably park more fighter planes on the carriers due to the presence of the destroyers.

 

The destroyers earn good returns on their own, make the whole enterprise safer, as well as boosting the fighting capability of the carriers (more fighter jets).

 

I like this analogy because "insurance carrier" is a common term.

[Palantir]

^ Hmm....why do you say that his float isn't invested in wholly owned businesses?

[Shane]

This is exciting news!  I hope his popularity doesn't cause the stock price to trade at a premium.  I would love to learn more about the specifics of the insurer!

[Cardboard]

Petey2720,

 

Are Canadian investors allowed?

 

Cardboard

[kmukul]

Similar query, At what point can the small investors get in? Any way of getting into ipo or do we have to wait for it to list in 2015 and then try to get into it if it isn't already 2-3x book

[giofranchi]

But the other question I have is that Pabrai may have to change his strategies if he were to invest the float like Buffet. In from 2008 to 2009, he had 65% mark to market loss at one point, which I believe is more than sufficient to wipe out an insurance company.

But if he invests like MKL, and only use 50-70% of float to buy stocks, I think it will be fine.

Thoughts?

How did Buffet invest so much into equity and not worried to be wiped out by MTM losses?

 

 

Let's say you just have an insurance company and nothing else in your holding company -- you'd better be pretty damn cautious about MTM losses on equities.

 

Now, instead suppose you also have a few very high quality (and wholly owned) companies surrounding it -- companies that just throw off tons of cash....

 

Two things just happened by adding the very high quality wholly owned cash machines:

1)  insurance ratings went up on the insurer, ultimately leading to better underwriting results (charge more for higher ratings)

2)  You can invest the float a bit more aggressively given the huge amounts of earnings power across the consolidated entity

 

I believe the insurance businesses within Berkshire would earn lower ROE as entities outside of Berkshire.  The structure boosts intrinsic value.

 

Similarly, I think an aircraft carrier is better off travelling in a convoy of destroyers.  Buffett is playing a little game of fleet admiral here.

 

That's a very good perspective, Eric.

 

Warren had squeezed cash from BRK to buy NICO which meant that a company with lousy returns was joined to a controlled insurer with a huge pile of cash and marketable securities. BRK's ownership of NICO gave Warren optionality; if NICO had got in trouble with high intrinsic value but low market value equity holdings on its BS Warren could have squeezed or even liquidated BRK with its remaining working capital to provide relief to NICO.

 

Things weren't all rosie.  Warren's investments were such a spiderweb of cross holdings that the SEC took interest and was about to bring suit around that time.

 

I think the key reason he took the plunge into investing almost all NICO's assets in equities was that equity holdings of insurance companies didn't have to be marked to market then.  If his regulator questioned those holdings which were likely carried at purchase price, Warren could have pointed to how solid the underlying businesses were.  NICO had been a homegrown Omaha success.  I suspect that the regulator of that local business was not unfriendly or activist.  :)

 

I agree that operating businesses, which throw off tons of cash are very good things to possess… I think this is self-evident!

But don’t forget that until the mid-90s’ almost 90% of the increase in BV for Berkshire was achieved thanks to insurance + investing. And during the 80s’ Berkshire practically only grew through insurance + investing.

Even if today marked to market accounting, like twacowfca suggests, limits the amount of equities an insurance company can purchase, without running too much risk, and therefore what Berkshire achieved during the ‘80s is no more replicable, I think Dhandho Holdings might still do pretty well. Think about Markel: Mr. Gayner is surely a smart investor, but he is no outlier, nor he has a better track record than Mr. Pabrai… actually, his track record is only slightly better than the S&P500. Yet, MKL has compounded BVPS at more than 16% for the last 20 years.

Dhandho Holdings imo is going to be a very good vehicle for compounding capital, even without owing operating businesses… This, of course, doesn’t exclude the fact Mr. Pabrai could very well decide to buy entire businesses in the future! :)

 

Gio

 

[muscleman]

But the other question I have is that Pabrai may have to change his strategies if he were to invest the float like Buffet. In from 2008 to 2009, he had 65% mark to market loss at one point, which I believe is more than sufficient to wipe out an insurance company.

But if he invests like MKL, and only use 50-70% of float to buy stocks, I think it will be fine.

Thoughts?

How did Buffet invest so much into equity and not worried to be wiped out by MTM losses?

 

 

Let's say you just have an insurance company and nothing else in your holding company -- you'd better be pretty damn cautious about MTM losses on equities.

 

Now, instead suppose you also have a few very high quality (and wholly owned) companies surrounding it -- companies that just throw off tons of cash....

 

Two things just happened by adding the very high quality wholly owned cash machines:

1)  insurance ratings went up on the insurer, ultimately leading to better underwriting results (charge more for higher ratings)

2)  You can invest the float a bit more aggressively given the huge amounts of earnings power across the consolidated entity

 

I believe the insurance businesses within Berkshire would earn lower ROE as entities outside of Berkshire.  The structure boosts intrinsic value.

 

Similarly, I think an aircraft carrier is better off travelling in a convoy of destroyers.  Buffett is playing a little game of fleet admiral here.

 

That's a very good perspective, Eric.

 

Warren had squeezed cash from BRK to buy NICO which meant that a company with lousy returns was joined to a controlled insurer with a huge pile of cash and marketable securities. BRK's ownership of NICO gave Warren optionality; if NICO had got in trouble with high intrinsic value but low market value equity holdings on its BS Warren could have squeezed or even liquidated BRK with its remaining working capital to provide relief to NICO.

 

Things weren't all rosie.  Warren's investments were such a spiderweb of cross holdings that the SEC took interest and was about to bring suit around that time.

 

I think the key reason he took the plunge into investing almost all NICO's assets in equities was that equity holdings of insurance companies didn't have to be marked to market then.  If his regulator questioned those holdings which were likely carried at purchase price, Warren could have pointed to how solid the underlying businesses were.  NICO had been a homegrown Omaha success.  I suspect that the regulator of that local business was not unfriendly or activist.  :)

 

I agree that operating businesses, which throw off tons of cash are very good things to possess… I think this is self-evident!

But don’t forget that until the mid-90s’ almost 90% of the increase in BV for Berkshire was achieved thanks to insurance + investing. And during the 80s’ Berkshire practically only grew through insurance + investing.

Even if today marked to market accounting, like twacowfca suggests, limits the amount of equities an insurance company can purchase, without running too much risk, and therefore what Berkshire achieved during the ‘80s is no more replicable, I think Dhandho Holdings might still do pretty well. Think about Markel: Mr. Gayner is surely a smart investor, but he is no outlier, nor he has a better track record than Mr. Pabrai… actually, his track record is only slightly better than the S&P500. Yet, MKL has compounded BVPS at more than 16% for the last 20 years.

Dhandho Holdings imo is going to be a very good vehicle for compounding capital, even without owing operating businesses… This, of course, doesn’t exclude the fact Mr. Pabrai could very well decide to buy entire businesses in the future! :)

 

Gio

 

So in the old days, Buffet's company was allowed to use 100% of float to buy stocks? How did he deal with the volatility?

[gary17]

I have a off-topic question that is related to this discussion...

 

so if let say i can get credit from the home i currently own and use that to buy say Markel or FFH or Brk - one of these compounders that use insurance float to leverage....  i think this really amplifies the leverage 

 

from MKL's 2012 report - their investment portfolio is about $1000 a share

if i pay $566 the market price - i'm getting this leverage  (about x2)

 

but if i'm borrowing then my cost is only the interest which is 3% or about $17/share -  so now i'm paying $17 for $1000 of portfolio -

 

is this the right way to think about investing in FFH / MKL / BRK ??

 

thanks