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Pabrai Investment Funds’ 2019 Q1 Investor Letter

Pabrai Investment Funds is a group of focused value funds managed by Mohnish Pabrai. According to data from January 2017, the fund held around $569.62 million in assets under management on a discretionary basis. Before he got into the investment world Mohnish Pabrai was an entrepreneur. Mohnish Pabrai is a value investor known for admiring and following the ideas of renowned value investors like Warren Buffett and Joel Greenblatt. Recently, the fund released its Q1 2019 Investor Letter, a copy of which was seen by Insider Monkey. In the letter, it has disclosed Q1 2019 returns for its three funds, reporting 5.4%, 3.8% and 13.1% gains.

It is not worth reading too much into the results of a single quarter. When markets are up double digits in a single quarter, we are unlikely to keep up. Three of our larger positions, Fiat Chrysler, Micron Technology and Rain Industries,are facing temporary headwinds in their businesses during the first half of 2019. All three management teams expect these headwinds to dissipate in the 2nd half of 2019 and beyond. Our investments in these businesses have very little to do with their short-term results. What I care about is the underlying intrinsic value of these businesses in a few years. While there are no guarantees in investing, we are likely to do very well with these and other holdings.

The three funds own fractions of a set of wonderful businesses run by exceptional leaders. In the last few years we have added some remarkable assets to the portfolio at significant discounts to underlying intrinsic value. My biggest challenge is to avoid doing anything to this terrific portfolio for several years. If I can just sit on my ass and do nothing for a few years, I think we’ll all be very well off. As Harina will attest, I am pretty good at doing nothing. So, that is the plan. Unless spectacular opportunities show up, there will be a few tweaks around the edges, but not much beyond that.

I would not be surprised if some of our bets flatline or even go south. A high error rate is par for the course in equity investing. Even with a few mistakes that will be sure to reveal themselves in the next few years, the results should be very acceptable. There is no other set of stocks I’d rather have the Pabrai family assets invested in.

We like Mohnish Pabrai. His returns are very volatile, but historically his stock picks delivered strong returns (sometimes experiencing large losses before delivering larger gains). I am not going to comment on Rain Industries because our focus is US stocks. Micron is a very small position in Pabrai’s 13F portfolio. He had $17 million invested in Micron at the end of December vs. $189 million in Fiat Chrysler. So, the single biggest determinant of Pabrai’s future returns will probably be Fiat Chrysler. Value investors love dinosaur auto stocks.

MOHNISH PABRAI

Here is what I don’t understand about auto stocks like Fiat Chrysler Automobiles NV (FCAU) or General Motors Company (GM) which was recommended by David Einhorn in October 2012 at the Value Investing Congress. General Motors was trading at a forward PE ratio of only 6 in 2012. This means if GM’s earnings don’t deteriorate, it will earn enough money to buy back the entire company from investors in 6 short years. It’s been 7 years and today GM shares still trade at a forward PE multiple of 6 and the stock underperformed the market over the last 7 years.

When I take a look at FCAU’s forward PE ratio on Yahoo Finance, I see mind numbing figure of 4.4. This usually tells me that the company should be able to earn enough money to buy back the entire company from its investors in less than 4.5 years (assuming that its forward earnings don’t improve or deteriorate over the next 4.5 years). This is really an unbelievable  number. Literally. I don’t believe it and I am pretty certain that most investors don’t believe it either.

It is clear to me that Pabrai believes in this number as he is almost betting the farm on this stock. Fiat Chrysler’s current market cap is almost $24 billion. I don’t believe FCAU can generate $5.5 billion hard cash per year for the next 4.5 years. I’d appreciate if Pabrai takes the time and explains to us in detail why he believes this is possible. He might be able to convince other investors and won’t have to wait for years to realize large gains in this stock.

Disclosure: None. This article was originally published at Insider Monkey.

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