Mohnish Pabrai can be trusted to give us, his followers, a real-life example of what contrarian investing is and how one should differentiate between “risk” and “uncertainty” while buying a stock.
In his lecture at MDI, Gurgaon, Mohnish Pabrai uttered prophetic words:
“Understand the difference between risk and uncertainty. In a situation where the uncertainty is high but the risk is low, the stock will be mis-priced and you must buy the stock”.
Mohnish emphasized that when we buy a stock, we must ensure that “Heads We Win, Tails We Don’t Lose Much“.
There is no example better than Jammu & Kashmir Bank to put the theory into practice.
First, J&K Bank is reeling under the scandal of alleged unreported NPAs (bad & stressed loans) estimated at about Rs. 2500 crore.
Second, J&K Bank faces the grim prospect of recovering from the heavy losses caused due to the devastating floods in September 2014. J&K Bank has a large exposure to the agricultural sector, much of which will be a write-off unless if the Govt/ RBI comes out with a bail-out package.
It is no surprise that investors are in no mood to keep J&K Bank in their portfolio. They have been busy dumping the stock. It touched its 52 week low of Rs. 129 today.
What is also surprising is that Parag Parikh, the veteran value investor who thrives on buying stocks at a bargain, has also lost confidence in J&K Bank. His PPFAS Mutual Fund dumped a large chunk of the stock in August and September 2014.
This is where Mohnish Pabrai’s contrarian streak becomes noteworthy. In the September 2014 quarter, he bought 75,71,950 shares for “The Pabrai Investment Fund LP” and 48,60,610 shares for the “Pabrai Investment Fund 3 Ltd”. His total investment in J&K Bank is 1,24,32,560 shares, worth a whopping Rs. 159 crore at the CMP of Rs. 128.
Interestingly, Mohnish has also increased his stake in South Indian Bank. I had earlier reported (July 2014) that he had bought 196,06,634 shares from Renuka Ramnath’s Multiples Equity and others. Mohnish’s current holding in South Indian Bank stands at 6,00,00,000 shares, worth Rs. 154 crore. These are held between three of his funds.
The most interesting part is that Mohnish Pabrai has overtaken Billionaire MA Yusuffali’s holding of 4,99,99,998 shares in South Indian Bank (MA Yusuffali has also been buying the stock aggressively and has increased his holding from 4,00,00,000 shares in June 2014).
Anyway, whether we want to follow Mohnish Pabrai’s contrarian strategy or not is a different thing, but the loud and clear message to us from Mohnish is that India is the right place to invest in and banking stocks is where our money should be.