Collection: Mohnish Pabrai - #29 'Bet Sizing'
[Transcript]
MOHNISH PABRAI 00:07
Yeah, that's a question I – a good question, I used to basically I think until 2008, if I made a bet it was typically a 10% of assets. And typically, you know the top 10 or 12 positions will makeup at least 80% of assets.
In 2008 and 2009, when we were seeing these massive drawdowns. I was also seeing lots and lots of opportunities in particular sectors and not enough time to really drill down and understanding business, even understand which one is the best.
For example, you know many different commodities businesses collapsed in late 2008. And you know, for a number of reasons many of them look great to invest in. So what I did is I made a basket bet. So I invested in each of these business at 2% of assets and we made up a number of different commodities type bets. And in fact, we had no [Inaudible] on every single one of them was a multibagger and that worked out well.
So what I did after the 2008-2009 timeframe, I basically came out with 3 threshold. An investment could be at 2% of assets, or 5% of assets or up to 10% of assets. And typically 2% would be something which is you know, either got a kind of asymmetric risk-reward possibility, but the risk is somewhat elevated is not as muted as we like but the rewards are you know, [Inaudible] if you will.
I mean like we exited the position but we have taken a position in Freddie and Fannie preferred and a number of different investors had recently taken those positions and such.
And you know those preferred by Freddie and Fannie got knocked down 95% even more at the bottom. I think they were down 97-98% from par, so very significant. So if they went to par and you were buying at the absolute bottom. In some cases, you had a 40-50x return possibility.
And of course, I didn't get into those prices but we were buying at still single digit you know, 7 or 8-9% of par. And of course, we – in the end we exited the position, we exited at a slight loss because we had another opportunity that look more interesting at the time and I wasn't fully and I'm still not fully convinced on the – on whether that would work out or not.
But the thing is with those preferred, it has moved up quite a bit since then. And in fact, you know recently Bruce Berkowitz was talking about making some proposal to the US Treasury that he and some investors would take over Freddie and Fannie part of the business and you know, those preferred would have par is part of that package.
So that was an example of something that if we took a 2% position of that. We would not have done more than that because they just have a bunch of [Inaudible] possibility but also had huge rewards as well.
So 2% could either basket or something unusual, 5% might be some normal type opportunity and 10%, you know, quite convinced about the prospects and such.
(Source: https://youtu.be/ot6pzc9ZwfU)
[YAPSS Takeaway]
- 2% could either basket or something unusual,
- 5% might be some normal type opportunity and,
- 10% quite convinced about the prospects and such.
