Mohnish Pabrai: A Bull's View in a Virus Shop
By: SumZero Staff | Published: April 13, 2020 | Be the First to Comment
To understand Mohnish Pabrai’s investing style, you need look no further than the source of much of his inspiration: Warren Buffett, who Pabrai and fellow investor Guy Spier famously bid $650,100 at a charity auction to have lunch with at New York City’s famed Smith & Wollensky Steakhouse in the summer of 2008.
Buffett’s influence on Pabrai’s world view is no secret: Pabrai’s books Mosaic: Perspectives on Investing and The Dhandho Investor: The Low-Risk Value Method to High Returns both draw from and expand upon the tenets expounded by Buffett, Charlie Munger, and Benjamin Graham. For Pabrai, this comes down to a straight-forward understanding investment as a formula for value. “Investing is not rocket science,” Pabrai writes in Mosaic, “It is pretty simple. It should be painfully clear how a business generates cash today, how much it is likely to continue to generate into the future and how much you're paying for that future cash flow.” Pabrai Investment Funds reflects that ethos.
To say that Mohnish Pabrai has a most bullish take on the COVID-19 pandemic and ensuing economic crisis that we’ve seen so far would be an understatement. His sunny optimism approaches a certain transcendence in its outlook that seems nearly disconnected from the grim scenarios forecast by mainstream media headlines.
To better understand the man and his predictions, we went straight to the source for this interview, conducted over email with questions from our team and SumZero CEO Divya Narendra. Answers have been lightly edited for clarity.
Many public market investors have notoriously short-term time horizons. Do you think investors have sufficiently discounted 2020 earnings and truly shifted their focus to 2021?
An investor with a short-term horizon is typically not an investor. Mostly those are speculators. When I invest in a business, I am rarely focused on 2020 or 2021 or 2022 earnings. The value of any business is the sum of cash that can be distributed to its owners over the life of the business discounted by a reasonable interest rate. 2020 or 2021 earnings are irrelevant.
Have current market conditions at all pushed your interest rate assumptions downwards as you think about discounting cash flows in your DCFs?
I do not run DCFs or use excel to figure out intrinsic value. It violates the fifth commandment1. If you can’t do the math in your head and with the fingers on one hand, it should be a pass. Whether the 10-year T-Bill currently yields 0% or 5% makes very little difference in my thinking on the investments I am making.
What happens to the markets if we get a second wave of COVID-19 cases before there is a vaccine?
Any part-owner of a business should be focused on the long term future of the business, not the market. I have no idea what markets will do in the future and I do not concern myself with such thoughts. It is hard enough to try to figure out the future trajectory of a few businesses. Trying to figure out what markets will do is a fool’s errand.
Man is a very clever animal. I have been incredibly surprised by the human ingenuity I have witnessed in response to COVID-19 in the last few weeks. My best guess is that lockdowns will start to be lifted in the next 3-4 weeks (or less) and will be almost completely gone in the next 8-12 weeks. We won’t be going to U2 concerts anytime soon and we may have (wristbands) identifying which category we fall in (immune or COVID-19-Free as of xxx date). And we may be wearing masks in public for a while. And I think we’ll be nearly 100% back to normal in 12 months. That U2 concert will be sold out and completely legal and allowed 18 months from now. I hope I can get tickets!
Which industries may be permanently affected?
Most businesses by their very nature are very fragile. A lot of mom and pop restaurants will unfortunately go bankrupt. Many small businesses will not make it. The government backstop is massive, but it is very hard to do this at scale and avoid widespread fraud. A lot of retailers won’t make it. In general, leveraged businesses are going to have a very hard time. I deeply admire what the Fed and Congress has done and are trying to do. They understand the situation well, but policies without unintended negative consequences are hard to execute when one is moving so fast.
What are some societal implications you anticipate in the aftermath of the pandemic?
Not much. This is the last pandemic we will see in our lifetimes. Just like we made many changes after 9/11 and the financial crisis, we are never ever gonna have a shortage of ventilators and masks. And we’ll have incredible leaps in technology to allow very rapid containment of future viruses. And humanity dodged a huge bullet. The wakeup call came after we saw what havoc a relatively mild virus can create.
You're obviously extremely optimistic of mankind's ability to both overcome this particular pandemic and future ones. Why do you consider covid 19 to be a "mild virus"? Which leaps in technology are you referring to specifically?
We have had viruses in the past with much higher R0 factors and much higher degree of fatalities. Think smallpox and Ebola. Relative to those Covid-19 is quite tame. Covid-19 caught humans flat-footed. Just fast forward a decade and ask yourself the following questions:
- How quickly will the US be able to increase ICU beds by 100,000? Hospital beds by 1 million?
- How many ventilators, masks, PPE, gowns etc. would be strategically stockpiled in the US? Globally?
- How quickly will we be able to test more than 20 million people a day? 50 million people a day?
- How quickly and precisely will we be able to do contact tracing and subsequent quarantines?
- What will be the state-of-the art with antivirals? Speed to vaccines? Speed to 7 billion doses?
- What would quarantine facilities look like? They may come in many formats, from Motel 6 to Ritz Carlton.
- Will namaste become the new global handshake? What will be standard sterilization protocols for bars/restaurants/public places?
- What kind of advances will take place in masks? Testing? Blocking viruses from entering lungs?
- Would any future social distancing extract a similar economic price? Will we get better at working remotely?
- What kind of tech advances and medical advances take place in treatments? Etc.
Look at the changes we made as humans after 9/11 and after the financial crisis and how quickly those changes were made and how normal we think taking our shoes and belts off at airports is.
Do you foresee a shift back to Value Investing (from passive investing) as a result of pandemic-related market volatility?
Value Investing is always a small minority pursuit. Very few humans can resist following the herd.
Do you have any thoughts on the US’s ramp up (or lack thereof) in testing for COVID-19? This is central to the reopening of the US economy.
I am very impressed with the various governors and our federal government. Some of them were slow to understand the enemy we are facing, but once it was understood, the policy response has been incredible. I give the US a 9.5/10 on our response. In about 2-3 months we will be well on the recovery path. We will have incredible testing ability within four weeks or less.
Can you quantify what you mean by "incredible testing ability within four weeks or less?”
There are announcements coming out daily from credible sources on incredible advances in testing. For example:
Man is a very clever and resourceful animal. It will blow your mind what humans will have in place in four weeks or less.
(Editor’s note: these answers were returned on April 10, 2020)
What do you think about the sheer scale of the fiscal stimulus and monetary actions by the Fed? Are we digging ourselves into a deeper hole or do you think these measures will provide the necessary jolt businesses and consumers need to get through the crisis?
I give The Fed 10/10 on their response. Amazing!
I'm encouraged by your take on the policy response. Do you have any worry about inflation rising excessively given all the money being injected into the economy? This would after-all, also impact your DCF assumptions.
The superstar athlete, Usain Bolt, has stumbled and fallen. The first task is to get him up and running again. There are serious domino effects we have to avoid. We got the great depression because there were runs on banks and banks failed en masse. The backstops are vital. Inflation is a secondary consideration right now. Bring out the biggest bazooka. Helicopter the money down from a zillion choppers.
We were told we’d get massive inflation after The Fed pumped trillions into the economy and Congress spent over a trillion in 2008-09. It has been 11 years. Where is the inflation? When A stops spending, we have to get B to do the spending. There is no choice. We’d be far worse off if B contemplated his naval and did nothing.
What are your three favorite stocks currently as long term buys?
I’ll duck this question…
I'll rephrase. So without specifically saying which are your favorites are there any stocks in particular that you think of as long-term compounders or value plays which you think warrant close reexamination due to Covid-19? In other words, do any great businesses come to mind which you think long term investors could buy at a significant discount to intrinsic value?
Let’s take a look at two stocks: Carriage Services (CSV) and Live Nation (LYV). I have never owned either one. Carriage Services is in the funeral services business. In the age of COVID-19, there is no chance that their business declines. In fact, the doom and gloom crowd should have piled into Carriage Services if they expected a million to die from COVID-19. From its December peak, Carriage is down 45%. Then we have Live Nation. They own Ticketmaster and, pre-COVID-19, enabled a concert to take place somewhere in the world every 15 minutes. Those 3500+ global concerts are now down to zero. And they are likely to stay zero for quite a while. From its recent February peak, Live Nation has been cut in half. I am curiously waiting for Live Nation to release its Q2 numbers in July. Their revenues may approximate zero. Quite different from the numbers Carriage Services is likely to report in Q2. Carriage will likely be quite profitable in Q2. How much sense do the valuations of these two businesses make today? And three months ago?
I love Live Nation as a business and I believe humans will be back to attending sold-out Taylor Swift concerts in close contact with each other in 2021. But even after a 50% drop, Live Nation is not cheap enough for an Excel-phobic guy like me. I still can’t do the math on it on one hand. Maybe after it reports a few zero revenue quarters I will finally be able to buy it. If there is a long-term compounder, it is Live Nation.
Any final thoughts?
This too shall pass. Humanity dodged this bullet very well and will make sure there are no future pandemics that create the mayhem this one did.
Follow Mohnish Pabrai on Twitter or his blog Chai With Pabrai. SumZero buyside members may contact him through his SumZero profile.
1Refers to Pabrai’s “10 Commandments of Investment Management,” “Commandment Five: Thou shall never use Excel.” According to Pabrai, “The investment process is simple, and you should not take help of an Excel sheet to figure out if something is a great investment. If you cannot figure it out in your head, it can’t be a great investment. If you find yourself reaching for Excel, you take a pass.”
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