Mohnish Pabrai launches ETF channeling Charlie Munger

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Mohnish Pabrai launches ETF channeling Charlie Munger

Post by Robert T » Thu Apr 21, 2016 1:31 pm

.
Background
  • From earlier Pabrai interview
    Transcript from the interview with Pabrai (my bold)

    “…one time I was having dinner with Charlie, and … he said if an investor just did three things, the end results would be vastly better than the rest.

    And he said one is carefully look at what the other great investors have done....

    And the second thing he said is, look at the cannibals. And what he meant by "look at the cannibals" is, look carefully at the businesses that are buying back huge amounts of their stock. Because they're eating themselves away, so he called them the cannibals.

    And the third is, he said, carefully study spinoffs."
ETF Strategy
Backtested (simulated) results (only go as far back as June 2009)
  • Annualized return (%)/annualized standard deviation 6/2009 to 3/2016

    20.4/ 14.3 = "Dhandho Junoon Index"
    16.9/ 14.9 = Russell Midcap Value
    15.2/ 13.5 = Russell 1000
Factor exposure of "Dhandho Junoon Index" 6/2009 to 3/2016
  • Alpha = 0.42
    Market = 0.96
    Size = 0.25
    Value = 0.20
    Momentum = 0.06
    Quality = 0.08
    R^2 = 0.92

    So midcap value (0.25 size load and 0.20 value load), with close to zero momentum and quality loads. Monthly alpha = 0.42%, annual alpha = 5.07% (for the period of the simulated backtest).
The methodology seems quite tortured, and the backtest starts only after the 2008 financial crisis, both of which raises questions on robustness of results (alpha). It seems often that the greater the outperformance of a backtest, the small the outperformance (or the greater the under performance of the live funds). Expense ratio = 0.75.

Will be interesting to see how this performs. Munger obviously has keen insights, as does Pabrai, but implementation also matters.

Robert
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Re: Mohnish Pabrai launches ETF channeling Charlie Munger

Post by matjen » Fri Apr 22, 2016 7:49 am

Thanks for posting Robert T.

To my way of thinking this type of ETF really crosses the line into just flat out active stock picking (not that you implied otherwise of course) when compared to the usual DFA/AQR/RA type of vehicles. It will be interesting to watch though for sure.
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Re: Mohnish Pabrai launches ETF channeling Charlie Munger

Post by nisiprius » Fri Apr 22, 2016 8:22 am

Manager strategies cannot be fully expressed in three pithy sayings (which are not operationally defined), and manager X claiming to be following three pithy sayings he thinks he heard from a lunch with investors Y and Z is not the same thing as quantitatively "channeling" investors Y and Z.

Even if he does refer to them by their first names.

Even if "Charlie" hasn't "talked about this publicly."

You might as well say "I heard Warren say 'be fearful when others are greedy and greedy when others are fearful,' so I have launched an ETF that follows that, and it will do as well as Warren."

"Look at the cannibals?" Great. I can do that, and so can Mohnish Pabrai, and so can any man. But when I look, will I see the same things that "Charlie" sees?

Will "Mohnish?"
Last edited by nisiprius on Fri Apr 22, 2016 7:07 pm, edited 1 time in total.
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Re: Mohnish Pabrai launches ETF channeling Charlie Munger

Post by quantAndHold » Fri Apr 22, 2016 9:34 am

Wow. I'm not quite sure what to make of the investment criteria.
  • 75% companies doing share buybacks
  • 20% "Investing With the House"
  • 5% spinoffs
The second and third items are known moneymakers for small investors. I'm guessing that the share buyback stocks are because there isn't enough liquidity for the rest to work at ETF scale, but I suspect the share buyback stocks will be a drag on the returns of the rest.

Mohnish is one of the world's great stock pickers. He announced awhile ago that he was working on an ETF, so I was curiously waiting to see what he came up with. This is it? I'm scratching my head. I'm sure he knows something I don't, but...huh?
Yes, I’m really that pedantic.

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Re: Mohnish Pabrai launches ETF channeling Charlie Munger

Post by lack_ey » Fri Apr 22, 2016 9:53 am

Well, none of these strategies are anything new, so that's a lot to be charging.

Anybody who follows these things know what the performance attribution would look like since the inception date? What drove the backtested returns over that period, how did it do prior to that, etc.? Any particular reason to just use buybacks as opposed to Meb Faber's shareholder yield or something else related? For sure you can just tweak the methodology for something like "select value manager holdings" and come up with something that was really strong over a 7-year period.

Man, for a product launch you think they would try harder and at least show a backtest of 10 years but they didn't even manage that.

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Re: Mohnish Pabrai launches ETF channeling Charlie Munger

Post by Robert T » Fri Apr 22, 2016 6:59 pm

.
First, in my view Pabrai is ‘one of the good guys’.

Here is an extract from an earlier interview with Steve Forbes.
Transcript: http://www.forbes.com/2010/04/09/pabrai ... ology.html
Video: https://www.youtube.com/watch?v=oaL2v1nVokw

My underlines.
Forbes: What’s an individual investor to do? You have some unique advice for individual investors.

Pabrai: Well the best thing for an individual investor to do is to invest in index funds. But even before we go there, you know, Charlie Munger was asked at one of the Berkshire annual meetings by a young man, “How can I get rich?” And Munger’s response was very simple. He said, “If you consistently spend less than you earn and invest it in index funds, dollar-cost average,” because you’re putting in money every paycheck, he said, “that in, what, 20, 30, or 40 years, you can’t help but be rich. It’s just bound to happen.”

And so any individual investor, if they just put away 5%, 10%, 15% of their income every month, and they just bought into the low-cost index funds, and just two or three of them, to split it amongst them–you’re done. There’s nothing else to be done. Now if you go to active managers, the stats are pretty clear: 80% to 90% of active managers underperform the indexes. But even the 10% or 20% who do, only one in 200 managers outperforms the index consistently by more than 3% a year. So the chances that an individual investor will find someone who beat the index by more than 3% a year is less than 1%. It’s half a percent. So it’s not worth playing that game.

Forbes: And in terms of index funds, S&P 500 or–

Pabrai: I’d say Vanguard is a great way to go. I think you could do S&P 500 index. You could do the Russell 2000. And if you wanted to, you could do an emerging-market index. But you know, I think if you just blend those three, one-third each, you’re done. And if you’re in your 20s and you start doing this, you don’t need to even go into bonds and other things. You can just do this for a long time and you’ll be fine.
He reemphasizes some of this on this website: http://dhandhofunds.com/aboutdhandhofunds/
  • We believe the key to building wealth is to:

    1. Start investing early in life
    2. Spend less than you earn. Always be saving 5, 10 or 15% of what you earn
    3. Try to maximize the use of tax deferred vehicles like IRAs and 401(k)s
    4. Invest in low cost index funds or ETFs

    We prefer if you considered our products as your investment vehicle, but even if you didn't and followed most of the above, we'd consider our mission a success.
Second on the fund offering. The current allocation is dominated by buybacks which will likely drive returns (75% of portfolio).

1. Buybacks [75 percent of portfolio].
  • I had earlier looked at this viewtopic.php?t=183243 . Recent performance seems to have been strong (particularly in large cap stocks). Backtests in Meb Faber’s Shareholder Yield does goes back to 1982 (from the advent of SEC rule 10b-8 that ‘allows’ issuer repurchases if abiding by certain rules) – and does show significant outperformance (1982-2011 annualized returns: S&P500 = 10.96%, Shareholder Yield = 15.04%, Dimensional Large Cap Value Index = 13.2%). In my earlier look forward I had the following observations:

    “If (net) buybacks continue to be prominent (relative to dividend yield) in the US, and if buybacks reverse the current downward trends in international/em markets then a buyback screen could add value beyond a dividend screen (in a value tilted portfolios). If this is the case, then for example, the Russell Fundamental Series will likely provide a higher expected return than FTSE RAFI, as was the case for the Russell Fundamental US Small Caps relative to FTSE RAFI Small Caps since 1996.

    However the continuation of (net) buybacks, even in the US is not guaranteed. For example, an earlier RAFI paper on Are Buybacks an Oasis or a Mirage? highlights the countervailing effect of stock options (which result in new share issuance), an M&A financing (from issuance of new shares) over buybacks. And its not clear that buy-backs will become as prominent in international markets as they are currently in the US.”

    In any event, if you are interested in buybacks: (i) the SPDR S&P 500 Buyback ETF provides a lower cost option – expense ratio = 0.35%; (ii) Trimtabs Float Shrink ETF IMO provides a more thoughtful screen with the addition of free cash flow and leverage, has a longer period of ‘live’ performance, but is more expensive – expense ratio = 0.99%; and (iii) the Russell Fundamental Series includes buybacks in its stock sort among other factors (but far from a pure buyback fund).
2. Selecting stocks of top value managers [20 percent of portfolio].
  • Alphaclone already tries to do this with modest success. For example from Performance Report:

    Since inception in September 2010: Returns (%)/Standard Deviation

    16.1/22.7 = “Value Masters Long Composite”
    15.6/22.2 = “Activist Masters Long Composite”
    15.3/18.4 = S&P500

    Higher return (but not dramatically so) with higher risk. The S&P500 was likely more tax efficient.

    The approach used in the Dhandho Junoon ETF is to select the best ideas of the top managers, weighting by shares in the manager portfolios. This can lead to a highly concentrated portfolio. For example the top 5 stock holdings in the Dhandho Junoon ETF account for 53% of the overall portfolio. This doesn’t leave much margin for error.

    I have been tracking a similar portfolio in M* of the most highly concentrated value managers – taking their top two ideas from 13Fs and including them in a 6 stock portfolio. The managers are: Bill Ackman, Eddie Lampert, and Ian Cumming/Leucadia since 10-23-2009. This is an ex-ante selection, rather than a backtest today to 2009. It also includes 25% bonds for comparions with other portfolios I track. For ease of calculation here are the returns from 2010 to date.

    2010 to date: Annualized return (%): Standard deviation

    9.1 / 13.4 = Ackman/Lampert/Cummings
    10.6 / 11.7 = S&P500
    9.0 / 8.2 = 75% S&P500: 25% iShares 3-7yr Treasury
    10.9 / 10.8 = 75% iShares Russell MidCap Value: 25% iShares 3-7yr Treasury

    So the simple value tilted index portfolio has outperformed the top ideas of highly concentrated ‘value’ managers by 1.9% annualized.

    The challenge with the simulated returns of the Dhandho Junoon Index (for this 25% part) is you can design selection criteria of stocks of top value managers to make a backtest look good but with fairly high uncertainty of what the future outcome will be (a higher uncertainty to the more rigorously in and out of sample tested factors). And I go back to Bernstein “in finance there are no certainties, only probabilities and you go where they are highest”.
3. Spin-offs [5% of portfolio]
  • There are a few spin-off ETFs already out there: the Guggenheim Spin-off ETF (CSD) - expense ratio = 0.65%, and the Market Vectors Global Spin-Off ETF (SPUN) – expense ratio = 0.55%. These have a small cap value tilt. And the backtest returns are not dramatically different from some of the smallcap value index returns.
From the above you could build a component ETF of buybacks and spin-offs at cheaper cost (as above) – and you can get exposure to both buybacks and spin-offs though the Russell Fundamental Small Cap fund (with expense ratio of 0.32%). There does not seem to be existing ETFs focusing on select stocks of highly concentrated value managers (although alpha clone provides this in private accounts) – but as above, I am doubtful of the prudence of this approach given that the odds of positive and persistent alpha above factor exposure are lower (higher dispersion of expected outcomes) than focusing to targeted exposure to the factors themselves (market, size, value, momentum). And as my experiment since 2010 in M* showed, there is a higher risk of underperformance.

Again, will be interesting to see how this performs, integrating all approaches into one.

Robert
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Re: Mohnish Pabrai launches ETF channeling Charlie Munger

Post by nisiprius » Fri Apr 22, 2016 7:09 pm

Wait, I don't get it. Are buybacks good or bad? "Cannibalism" doesn't sound good. Do we want to concentrate on the cannibals or avoid the cannibals?
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Re: Mohnish Pabrai launches ETF channeling Charlie Munger

Post by Robert T » Fri Apr 22, 2016 7:13 pm

.
Buybacks are generally good for existing shareholders, all else held equal - its the opposite of stock dilution which is generally bad of exiting shareholders (re the earlier Bernstein & Arnott article https://www.researchaffiliates.com/Prod ... lution.pdf ).

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Re: Mohnish Pabrai launches ETF channeling Charlie Munger

Post by jhfenton » Fri Apr 22, 2016 7:49 pm

The result is a strangely-concentrated portfolio:

16.8% Anthem Inc.
16.68% AutoZone Inc.
12.15% The Travelers Cos Inc.
3.74% Six Flags Entertainment Corp.
3.66% American International Group Inc.
3.51% Lear Corp.
3.31% Allied World Assurance Co. Holdings AG
2.79% Dillard's Inc.
2.70% The Gap Inc.
2.59% Primerica Inc.

No thanks.

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Re: Mohnish Pabrai launches ETF channeling Charlie Munger

Post by Robert T » Sat Apr 23, 2016 3:48 am

jhfenton wrote:The result is a strangely-concentrated portfolio:

16.8% Anthem Inc.
16.68% AutoZone Inc.
12.15% The Travelers Cos Inc.
3.74% Six Flags Entertainment Corp.
3.66% American International Group Inc.
3.51% Lear Corp.
3.31% Allied World Assurance Co. Holdings AG
2.79% Dillard's Inc.
2.70% The Gap Inc.
2.59% Primerica Inc.

No thanks.
The methodology weights stocks by the relative shares of buybacks, so companies with the greatest percent of buybacks gets the greatest weight. Over the full period of the backtest, 3 companies - Autozone, Anthem, and Travelers - had large buybacks. They would likely have had the largest shares in the portfolio (capped at 17%), accounting for about half the portfolio over the full period of the backtest. Each reduced their share float by over 40 percent since 2010, and by about 60 percent since 2006, through buybacks. So the backtest is significantly influenced by the performance of just 3 stocks, of which Autozone performed remarkably well. In the absence of additional explanation, my concern/suspicion is the 75 percent weight to buybacks was used to make the overall portfolio backtest look good/better, with performance driven by the same few stocks over the full period.

Looking forward, the rate of buybacks of these three companies has slowed so their share in the portfolio may decline, perhaps leading to a less concentrated portfolio. Will there be another Autozone type company (high buybacks, very good returns) in the future? Don’t know.

The dispersion of performance for companies with similar rates of buybacks varies significantly. For example, from 2006-2016, the annualized returns of Autozone = 22.5% vs. 7% for Anthem, and respect returns in 2008 = +16% vs. -52% (both these companies had similar rates of buybacks).

The 22 value managers in the selection pool, are also highly concentrated. The top 5 stocks of 14 of these managers (65 percent of the managers in the list) accounted for over 60 percent of their portfolios - so highly concentrated. The fund also weights by respective shares of stock holdings i.e. the higher the share of the stocks in the manager portfolio to larger the share in the Dhandho ETF.

Pabrai has also held a concentrated portfolio of stocks at Pabrai Fund, I think currently one stock accounts for half of the portfolio. This can obviously work well if these stocks perform well (as has Autozone over past decade), but when one of them tanks it can also be a significant drag on the portfolio (e.g. Horsehead holding in 2015).

Robert
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Re: Mohnish Pabrai launches ETF channeling Charlie Munger

Post by nisiprius » Sat Apr 23, 2016 5:43 am

Robert T wrote:.
Buybacks are generally good for existing shareholders, all else held equal - its the opposite of stock dilution which is generally bad of exiting shareholders (re the earlier Bernstein & Arnott article https://www.researchaffiliates.com/Prod ... lution.pdf ).
Well, sure. The people who like buybacks say that they are better than paying dividends.

But Charlie Munger uses the word "cannibals."
And the second thing he said is, look at the cannibals. And what he meant by "look at the cannibals" is, look carefully at the businesses that are buying back huge amounts of their stock. Because they're eating themselves away, so he called them the cannibals.
This is clearly supposed to be an important and non-obvious principle. But is he saying look carefully at the cannibals so you can concentrate on holding them, or is he saying look carefully at the cannibals so you can avoid them?

As a casual investor, could you do this by holding a meaningful "tilt" to the PowerShares Buyback Achievers ETF (or, if the "cannibals" are bad, by shorting it?

Are we sure he isn't talking about short-term unusual buyback activity as a trigger for picking individual stocks in which to make some kind of bold speculative move?
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Re: Mohnish Pabrai launches ETF channeling Charlie Munger

Post by sunnywindy » Sat Apr 23, 2016 6:03 am

Share buy backs are controversial. This is from former Treasury Secretary Robert Reich:

"A big reason why CEOs are about to rake in big year-end bonuses even though their sales are lousy (after all, America’s vast middle class and poor aren’t earning enough to buy much) is CEOs been using their companies’ cash, plus whatever they can borrow at rock-bottom interest rates engineered by the Fed, to buy back their own shares of stock. This maneuver raises the price of the remaining shares, thereby giving the CEOs – whose pay is tied to share prices – huge rewards. This year, the 30 companies listed on the Dow Jones industrial average authorized $211 billion in buybacks, lifting the Dow (and CEO pay) to record heights. This $211 billion could have gone instead to American workers in the form of higher wages – which would have come back to companies in the form of higher sales. McDonald’s, for example, spent $6 billion on share repurchases and dividends last year, the equivalent of $14,286 per restaurant worker employed by the company. It’s a vicious cycle as long as CEO incentives are directed toward raising share prices rather than sales, and as long as the economy is organized around the stock market rather than good jobs."

https://www.facebook.com/RBReich/posts/716213048391294

I interpret "canibal" as a negative.
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Re: Mohnish Pabrai launches ETF channeling Charlie Munger

Post by edge » Sat Apr 23, 2016 8:01 am

Buy backs are problematic and it does seem like munger' comments are ambiguous.

IMO CEO pay should be tied more directly to business objectives/results and not share price. Tie to share price is easy for lazy boards but ultimately self destructive.

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Re: Mohnish Pabrai launches ETF channeling Charlie Munger

Post by packer16 » Sun Apr 24, 2016 9:51 am

Munger was referring to buy backs being good. The ultimate example was Teledyne in the 1970s when it bought back significant shares. One key in my mind for buybacks is to buy a growing "good" business that is undervalued. If you are buying a shrinking business or even one that could shrink in the future it is more risky, think Dell. Therefore, for most of the shrinkers paying dividends makes sense as you are not guessing if your company will be worth more than in the future.

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Re: Mohnish Pabrai launches ETF channeling Charlie Munger

Post by dharrythomas » Sun Apr 24, 2016 12:43 pm

My assumption is that Munger thinks buy backs are good even though the comment about eating themselves sounds negative. I have no other basis than that IBM is a big Berkshire Hathaway holding?

I don't know what to think this issue cuts both ways. I've read "The Outsiders" and I've also seen companies buy back a great deal of stock at market peaks and then have to go out and raise expensive capital when times went bad, often within a year of their most expensive buy backs.

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Re: Mohnish Pabrai launches ETF channeling Charlie Munger

Post by HomoLudens » Sun Apr 24, 2016 6:07 pm

nisiprius wrote:Wait, I don't get it. Are buybacks good or bad? "Cannibalism" doesn't sound good. Do we want to concentrate on the cannibals or avoid the cannibals?
Apparently, the answer to this question depends on one's perspective. Pabrai advocates being at the table as a customer rather than being on the table as part of the menu. In other words, investors who buy and hold in those companies will profit as opposed to those who sell early in the game. Having said that, I am suspicious of these types of explanations. Ever since I read Lakoff and Johnson's book "Metaphor We Live By", I am cognizant how all sorts of people, either "good" or "bad", substitute analysis for clever metaphors to sell their products.In this particular case, I will pass the opportunity and will stay away from the table.

P.S. Lakoff's book is not about finance, but it's a great way of learning how the financial industry can and often does abuse language.
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Re: Mohnish Pabrai launches ETF channeling Charlie Munger

Post by nisiprius » Sun Apr 24, 2016 7:55 pm

Munger advocates seeking out the cannibals, joining them, and sharing in their feast?

Yes, I know it's just a metaphor, but want to understand what it's a metaphor phor.
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Re: Mohnish Pabrai launches ETF channeling Charlie Munger

Post by HomoLudens » Wed Apr 27, 2016 3:42 pm

nisiprius wrote:Munger advocates seeking out the cannibals, joining them, and sharing in their feast?

Yes, I know it's just a metaphor, but want to understand what it's a metaphor phor.

The metaphor is just a sales pitch to yield-hungry investors. It makes a perfect sense from a gastronomical point of view. :happy
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Re: Mohnish Pabrai launches ETF channeling Charlie Munger

Post by G12 » Wed Apr 27, 2016 3:55 pm

nisiprius wrote:This is clearly supposed to be an important and non-obvious principle. But is he saying look carefully at the cannibals so you can concentrate on holding them, or is he saying look carefully at the cannibals so you can avoid them?
Perhaps he is implying stay away from companies that buy back stock at hugely overvalued prices, of which there are many. I would much rather be paid a dividend that paying ~ 40% too much to retire outstanding stock and it happens much more frequently than people think. In some ways buy backs can be catch - 22 as when it is most advantageous to buy back stock the company does not have the liquidity to do so.

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Re: Mohnish Pabrai launches ETF channeling Charlie Munger

Post by bhmlurker » Wed Apr 27, 2016 4:47 pm

As a shareholder, issuing more stocks is good when the shares are overvalued, which is usually also when prices rise far beyond company's forward cash flow. It's the same as deciding when to IPO your company. You would want as high of share price as possible. The reverse holds true, buy back shares when the share price is in the dumps despite solid fundamentals.

I don't think it's a good idea to say that share buyback a is generally good or bad, just as it's not clearly good or bad for a company to expand, buy another company, pay down debt, or issued dividend. It really depends on company cash flow, share price, share price of competitors, interest rate, and a host of factors.

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Re: Mohnish Pabrai launches ETF channeling Charlie Munger

Post by Robert T » Fri Apr 29, 2016 6:41 am

.
At least Pabrai is consistent - mentions cannibals, spinoffs, cloning in this presentation from 2009.

http://mebfaber.com/2013/03/27/cloning- ... i-version/

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Re: Mohnish Pabrai launches ETF channeling Charlie Munger

Post by HomoLudens » Sat Apr 30, 2016 6:39 pm

Robert T wrote:.
At least Pabrai is consistent - mentions cannibals, spinoffs, cloning in this presentation from 2009.

http://mebfaber.com/2013/03/27/cloning- ... i-version/
Thank you for the link. I wasn't aware of it and I am sure it's going to be educational. I don't dispute the consistency of his approach. In fact, I enjoyed watching his Google presentation as well as his investment twin Guy Spier's presentations on various topics. I also read his book "The Dhandho Investor". I am not challenging the value of his approach. I am just being skeptical about the value of his approach to a retail investor. At the very least, a retail investor should be familiar with the agency problem embedded in corporate buybacks: the management has short-term incentives to engage in these buybacks. Are these incentives aligned with those of retails investors? Personally, I am not prepared to bet my own money on a strategy that tries to capitalize on perverse incentives and short-termism. Moreover, Prabai prefers concentrated bets. One of his biggest bets was, probably still is, Chesapeake Energy Corporation. I will stop here. Everyone can check its price movements.

P.S. On a different note, I really want to thank you for your posts on this forum. I have been reading them for a long time and I learnt a great deal from them. These posts proved immensely educational and taught me the habit of systematic financial thinking stripped of adjectives and misplaced metaphors.
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Re: Mohnish Pabrai launches ETF channeling Charlie Munger

Post by Robert T » Sat Apr 30, 2016 9:13 pm

HomoLudens wrote: Thank you for the link. I wasn't aware of it and I am sure it's going to be educational. I don't dispute the consistency of his approach. In fact, I enjoyed watching his Google presentation as well as his investment twin Guy Spier's presentations on various topics. I also read his book "The Dhandho Investor". I am not challenging the value of his approach. I am just being skeptical about the value of his approach to a retail investor. At the very least, a retail investor should be familiar with the agency problem embedded in corporate buybacks: the management has short-term incentives to engage in these buybacks. Are these incentives aligned with those of retails investors? Personally, I am not prepared to bet my own money on a strategy that tries to capitalize on perverse incentives and short-termism. Moreover, Prabai prefers concentrated bets. One of his biggest bets was, probably still is, Chesapeake Energy Corporation. I will stop here. Everyone can check its price movements.

P.S. On a different note, I really want to thank you for your posts on this forum. I have been reading them for a long time and I learnt a great deal from them. These posts proved immensely educational and taught me the habit of systematic financial thinking stripped of adjectives and misplaced metaphors.
HomoLudens,

The original presentation was much longer (1hr+), but the linked version seems to be condensed into the short presentation. Obviously when someone says they have returned 25.7 percent annualized over 18 years it gets your attention.

I enjoy watching his presentations (also read The Dhandho Investor), and I have learned a lot. The challenge is reality is often different from perception – and even investment ‘gurus’ such as Pabrai have had a tough time beating value oriented indexes. For example:
  • 2003-2015 (13 years): Annualized returns (%)/Sharpe ratio

    12.0 / 0.41 = Pabrai Investment Fund (PIF3)
    12.2 / 0.54 = S&P500 Pure Value Index (tracked by RPV since 2006)
    11.3 / 0.58 = Russell Midcap Value Index (tracked by IWS since 2001)
    ..8.9 / 0.53 = S&P500
So while Pabrai has handily beaten the S&P500 over the last 13 years, the S&P500 Pure Value Index has done just as well, and with lower volatility (higher Sharpe ratio). In the future he may get back to higher returns, but it is amazing to me that a value oriented index has keep up with some of the most highly regarded value investors (a plus for individual DIY investors).

On buybacks, Buffet and Munger talked about them today at the Berkshire shareholders meeting.
  • Buffet – “anytime you can buyback stock for less than its worth, its advantageous to the continuing shareholders, but it should be by a demonstrable margin”…”you will not find a lot of press releases about buybacks that say a word about valuation”.

    Munger – “elsewhere in corporate America these buyback plans get a life of their own, its gotten quite common to buyback stock at very high prices that really don’t do the shareholders any good at all, I don’t know why people exactly are doing it, I think it gets to be fashionable”.
The current buyback screens on the Dhandho ETF (or other buyback ETFs, as far as I know) don’t include valuation considerations. It didn’t seem to matter in the backtest, and no guarantees for the future.

Given the ETF was created by Pabrai it got my attention, just doing the due diligence (I don't own shares in it).

Pleased you enjoy the posts. I also learn a lot from writing them.

Robert
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Re: Mohnish Pabrai launches ETF channeling Charlie Munger

Post by Robert T » Wed May 04, 2016 8:13 pm

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Interesting article on buybacks (focusing on Teledyne and Northrup Grumman) http://investorfieldguide.com/shrinkage-vs-growth/

Written by Patrick O'Shaughnessy (son of Jim O'Shaughnessy author of What Works on Wall Street). He has some very interesting articles/research on that site.

Robert
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Re: Mohnish Pabrai launches ETF channeling Charlie Munger

Post by HomoLudens » Wed May 04, 2016 9:36 pm

Robert T wrote:.
Interesting article on buybacks (focusing on Teledyne and Northrup Grumman) http://investorfieldguide.com/shrinkage-vs-growth/

Written by Patrick O'Shaughnessy (son of Jim O'Shaughnessy author of What Works on Wall Street). He has some very interesting articles/research on that site.

Robert
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Thank you very much. I read "What Works on Wall Street" , of course. I didn't know that the son worked in the same general area. This reminds me of two interesting articles to share:
1. John Huber just published an article about the collapse of SunEdison and the increasing use of "yieldco" entities. http://basehitinvesting.com/
2. Prof. Damoradan just published another article on the margin of safety and how the concept has been used and abused: http://aswathdamodaran.blogspot.com/.
"'Thoughts without content are empty, intuitions without concepts are blind." Immanuel Kant

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