Video Link: https://youtu.be/TOGTUv4uiOY
In this episode, Mohnish Pabrai was asked to talk about a past mistake, how does he use that going forward in the future to make a decision?
In this episode, you’ll learn:
Mohnish Pabrai investment mistake in Sears during 2009.
How liquidation value can be an illusion?
To check out all Collection: Mohnish Pabrai <click here>
AUDIENCE MEMBER 00:00
Can you talk about a past mistake or give an example? And then how do you use that going forward in the future to make a decision?
MOHNISH PABRAI 00:09
You know, there are so many mistakes because, you know, the best investors are going to be right two out of three times. And you know, I'm far from the best. So we have a long list of mistakes. So let me think of a juicy one to talk about.
There's many mistake like for example, I used to have an investment in Sears. And you know, of course the thesis was – and in fact, even the people who are invested in Sears today – the thesis is that their real estate holdings alone are worth multiples of the stock. And so you have a huge underlying set of assets which is significantly above the current market cap.
And you know, I remember I had – I think this was in 2009 and it was in June of 2009, I had lunch with Charlie Munger and it was the first time I had lunch with him. And you know, this was the lunch that Warren Buffett had set up.
And so I went with my wife and you know, I just thought it will be one of these, you know social lunches. And you know, I can tell Charlie how much I admire him and so on so forth. Charlie had a – Charlie came with a printout, he doesn't use a computer but he came with a printout of Gurufocus which listed my portfolio. Which his assistant must have printed out for me.
And he opened it up and he pointed to Sears, and then he said to me, you know, "Mohnish I noticed that you own Sears." And I said "mm-hmm." And then he said – he did this.
Okay, anytime you're talking to Charlie Munger and he does this. What you do is as soon as that meeting is over, you dumped the entire position. Okay, because you don't need any more indicators that you are out there without a paddle.
And so Charlie said to me after he finished shaking his head. He said that you know, "Warren and I were in the retail business with Diversified Retailing in the early 70s." They bought these department stores in Baltimore. And he said they were very lucky to be able to sell at – sell those stores off for almost approximately what they bought them for.
In fact, one of the only times when Berkshire has sold a wholly-owned subsidiary. You know, they've had subsidiary go to zero, get closed down like Berkshire Hathaway Mills. But typically when businesses are in decline or whatever else, they just run them down, the sales are few and far between. So they sold that.
And of course, he pointed out to me that Sears between the real estate being liquidated and that cash coming to investors. There were more than a hundred thousand employees in all the stores.
And if any of you have run a business before, you know anytime you have to let a person go, it is a gut-wrenching thing to do. And now, if you have to let a person go who is incompetent, I have no problem with that. You know, sometimes that's good for you and the person, they can find a better calling in life.
But if the person is being let go for no reason other than the business is doing poorly, that is terrible because you know, they didn't do anything wrong, they're doing their jobs well. Well, Sears has, you know, a hundred thousand of those people.
And so if you want to go in and want to monetize that real estate, you have to get rid of the people. And no matter how stone-hearted you are, that is an extremely difficult gut-wrenching thing to do.
And so what we have going on – and of course, this has been sixth years since Charlie got me out of Sears. And the good news at that time was in June 2009, everything else was still depressed. So even though I took a loss on Sears, I forget what we bought but I'm sure we made multiples of whatever we bought at that time. So thank you Charlie we're most appreciative.
And so, you know, this is a situation where I had ignored this very basic fact that liquidation value can be an illusion because especially when businesses have people and all these sort of things.
And I think even Eddie Lampert realizes that he could monetize the real estate, but I think he realizes how difficult or gut-wrenching job it is to just turn all the switches off.
And so what we have going on at Sears is a liquidation in slow motion. And so they keep shutting a few stores and of course, what is happening at the same time is the economy is reconfiguring.
You know, stuff is going to Amazon, more and more stuff is going online. So they are not in a steady-state model. In fact, even the value of the real estate, one can argue may be going down because what is the value of a shopping mall in an Amazon world. You know, so you have issues along those lines. So that's one mistake.
If you would like to talk what more – I can – I have an endless stream of mistakes to talk about. We have takes out the yin-yang. (Laughter)
ARVIND NAVARATNAM 06:21