Collection: Mohnish Pabrai - #103 'Value Play'



You mentioned your thesis with Frontline is that you thought there is a liquidation value for around 9 dollars a share that you sold when you got around there. You mentioned that you should have waited longer, right? Was your process wrong? ‘Cause you sold at what you thought was intrinsic value to a certain degree.

So you mentioned humans sort of vacillate between fear and greed, how do you avoid that in your own decision-making?


Yeah, I think that is a very good question because this is a, you know – good, Arvind has muted – which is great.

You know, because this is actually happening right now in real-time. So there is Frontline 2.0, another company which has just shown up on the radar, which shall go unnamed so you guys don’t drive up the price.

But Frontline 2.0 is basically a situation where it is trading, currently – And I am still doing the research, I hope this weekend to really get my teeth into it. It seems to be trading at half of the liquidation value, very similar to Frontline, all the debt is at the individual ship level and such. So it's trading at less than half. The rates and the utilization have kind of gone down, which is what the market is concerned with, and the prices have gone down like 70%-80% in the last year or two.

And so clearly, it's a – If after I do my analysis, I get comfort that something that's – let’s say for argument sake – is trading at $20 a share and let's say is worth $40 – the liquidation value is $40.

So clearly I don’t need to make a decision today about when I would sell. I know that I am gonna sell at $40 or above, right? So I don’t need to make that decision today, I got time. I might have a year or two to figure that out and do more work to figure that out, which is good.

But what I will not do which I did with Frontline is, I will not sell at 90% of $40. With Frontline, I was very clear 90% of liquidation value, I was out of there, I don’t want anything more to do with it. Because I think I have a juvenile understanding of the huge swings in human nature and all of that.

And so now that the benevolent gods of investing are giving me another crack at the apple, I’ll try not to disappoint them this time.

And so I figured out a few things. I could do something like cut my possession in half. You know, take half the money off the table for example. I could do that which is, I could have gotten all of my principals out if you will. If I invested, you know, $20 million and it is gone to $40 million, I could pull $20 million out and then say okay, now let humanity do whatever it wants.

And when we can't lose money because we – that is one way I could skin it or the another way I could skin it, is to let it go a little further which is look at what is going on with the business at that time and try to understand some more about the dynamics and see whether it's a high probability that this can – you know, that this can go to 1.5 times the liquidation value or something or not.

So we don’t need to make that decision today. I think if you pull a gun to my head and said "make that decision today." I will probably take the approach of something along what I said which is; take the principal out, leave the rest but leave the rest again with a taper.

In the sense that the next double, take another half off and the next – Because you know, this is not Coke, we know this is not Coke, we know this is not Moody’s. We know it's going to crash and burn one day. We know that. And it may take 5 years before it crashes and burns.

But, we don’t want to be there for 4.5 years, thinking it will go for 5 years. So if we get our double, we might do it that way.



[YAPSS Takeaway]

1. Not all companies are like Coke or Moody's or other great businesses with great moat. Holding companies with no moat for long term might not be wise.