We Don’t Buy Stocks With Less Than 5x Multibagger Potential: Mohnish Pabrai & Guy Spier

Mohnish Pabrai rejects Guy Spier’s stock idea on the basis that it has “less than 5x potential”

“I sent Mohnish an idea recently. He said then if it is not a 3 or 4x, I am not interested in it,” Guy Spier lamented.

Mohnish Pabrai corrected him.

“No, no I told him it is not a 5x, do not waste my time there”.

Obviously, the exchange is light-hearted banter between the two stalwarts though, in hindsight, the moderators ought to asked the duo what the 2x idea was because even if Mohnish is not interested in it, we certainly are.

(Comrades-in-arms: (L-R) Niraj Shah, Guy Spier, Mohnish Pabrai & Ajaya Sharma)

Stock idea will be revealed in the ValueX conference

Mohnish and Guy revealed that stock recommendations would be made at the ‘Value X’ conference. It appears that the conference will be held in Kazakhstan. It is an ‘invitation only’ event.

We will have to keep a close eye on the conference to see what stocks are recommended.

Are airline stocks a good buy now?

Warren Buffett’s change of stand with regard to airline stocks has understandably mellowed the sentiments of other investors towards these stocks.

I have earlier pointed out that Warren Buffett had condemned airline stocks as being the “worst sort of business”, “death trap for investors”, “biggest mistake” etc.

In fact, such was the aversion amongst the intelligentsia for airline stocks that when Rakesh Jhunjhunwala, the Badshah of Dalal Street, defied Warren Buffett’s credo to buy Spice Jet, the ET had the nerve to ask “Did Jhunjhunwala err when he bought a stake in SpiceJet?”

Of course, Rakesh Jhunjhunwala showed who’s boss by effortlessly pocketing 3x gains from SpiceJet.

Later, in a dramatic move, Warren defied his own credo and bought massive Billion dollar stakes in Delta Airlines, Southwest Airlines Co and two other airline companies.

#WarrenBuffett is investing billions into an industry he once called a 'death trap' | #investing #airline #Finnair https://t.co/2H6PmQH9uP

— Timo Nurminiemi (@TimoNurminiemi) February 16, 2017

MUNGER SAYS HE AND WARREN BUFFETT ONCE CONSIDERED AIRLINE INDUSTRY A "JOKE," BUT THAT INDUSTRY HAS IMPROVED

— Jennifer Ablan (@jennablan) February 15, 2017

In his latest letter to the shareholders of Berkshire Hathway, Warren Buffett has maintained a conspicuous silence about the rationale for the somersault though he observed:

“Keep in mind that airlines have sometimes jacked up prices for the Berkshire weekend – though I must admit I have developed some tolerance, bordering on enthusiasm, for that practice now that Berkshire has made large investments in America’s four major carriers.”

Becky Quick, the charming journalist with CNBC, grilled Warren about his new-found fascination for airline stocks.

Warren provided a masterful explanation:

“It’s true that the airlines had a bad 20th century. They’re like the Chicago Cubs. And they got that bad century out of the way, I hope. The hope is they will keep orders in reasonable relationship to potential demand,” the Oracle of Omaha said with his characteristic clarity of thinking.

However, Warren Buffett made the astonishing revelation that he has “not taken a commercial flight for years”. He did not elaborate the reasons and instead told Becky that “We’ll save that (conversation) for after the show”, implying that there are personal reasons for his abstinence. Does he have a fear of flying?

Mohnish Pabrai and Guy Spier have come out with all guns blazing in favour of airline stocks.

“Indian Airlines have some similarities to the US airlines and they have some differences as well. One of the differences is that in India, the airlines sector is actually a little bit better than the US because fares are lower, fuel is a bigger portion of the pie than it is in the US and one of the reasons for the bet on airlines in the US is that we are never going to see for any sustained period of time, oil over $60 and in fact we may not even see it over $50,” the duo said.

They added that “low cost carriers like Indigo and such are extremely well managed”.

It is worth recalling that Indigo Airlines has been strongly recommended by Raamdeo Agrawal in the Sohn India conference. He also disclosed that he has a large investment in the airline.

However, some noted experts are not impressed by the sudden change in sentiment:

This is funny@WarrenBuffett buys airlines
All "Value" investors who till yesterday called airlines junk business buying today
Own brains?

— sandip sabharwal (@sandipsabharwal) February 27, 2017

Though airline stocks got a clean chit as being investment worthy:

Our investors will be happy that we own airline stocks due to our own view, as others buy we will make moneyhttps://t.co/zSSEbAv54G

— sandip sabharwal (@sandipsabharwal) February 27, 2017

Raamdeo Agrawal candidly admitted that he may have overestimated the earnings potential of Indigo Airlines though he confirmed that he is still bullish about its prospects.

Experts dissent over merits of Index Funds vs. Managed Funds

Warren Buffett has been consistently advising average Raju investors to buy passive index funds instead of active managed funds.

In his latest shareholder’s letter, Warren Buffett has gone for the jugular and proved with a real-life example that the hefty fees charged by the managers of active funds wipes out the gains made by the funds and leaves the investor in a worse position than he would have been if he had simply invested in a passive Index Fund.

“… active investment management by professionals – in aggregate – would over a period of years underperform the returns achieved by rank amateurs who simply sat still. I explained that the massive fees levied by a variety of “helpers” would leave their clients – again in aggregate – worse off than if the amateurs simply invested in an unmanaged low-cost index fund,” Warren thundered, his voice dripping in contempt.

“The bottom line: When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds,” he added in an authoritative tone.

However, Samir Arora, the whiz-kid fund manager with Helios Capital, is not impressed with Warren Buffett’s broad brush advice. He has opined that one has to adopt a case-by-case strategy and all active fund managers cannot be condemned in one stroke.

Since I expect that Buffett will talk about how index funds r great in his new letter, I wanted to start this debate pic.twitter.com/yjXRDNSxC1

— Samir Arora (@Iamsamirarora) February 25, 2017

Samir Arora’s theory met with a mixed response from his army of followers. Some agreed with him:

. @Iamsamirarora Pardon my long reply but I quiet think u make it a point. Have had similar thoughts for quite some time pic.twitter.com/YU8ZR2bdz0

— Yamini Sood (@Yaminintweet) February 25, 2017

@Iamsamirarora why have Ted and Tod been hired and paid so much? Buffett could have bought index funds?

— Nitin (@ONLYNITIN) February 26, 2017

However, others opposed him:

A shining example of crap disguised as logic, folks. #smh https://t.co/2TN1TA4WYL

— Harish Subramanian (@HarishSub) February 25, 2017

Mohnish Pabrai has given Index funds a clean chit:

“Index funds are a great way to go …. the best answer is the Nifty 50 index …. The best thing that large institutional investors in India — mom and pop investors — can do is go into the Nifty 50 and do dollar cost averaging,” he said.

Bill Ackman warns of “Index Fund Bubble”

Bill Ackman, the Billionaire fund manager with Pershing Capital, has warned in his letter to investors that the excessive popularity of Index Funds is leading to a “Bubble” in which stocks which are in the Index, for non-meritorious reasons such as their size, industry etc are being bought heavily while other more meritorious stocks are being ignored because they are not in the Index. He also warns that because Index Funds are “passive”, they do not take much interest in corporate governance issues even though they are major shareholders and can influence decisions.

Look for stocks with low risk and high returns and when you spot an anomaly in pricing, grab the stock with both hands

Mohnish Pabrai and Guy Spier offered valuable advice that investors should look for stocks that are “really cheap” and have a “high margin of safety”.

They also advised that if investors spot an anomaly or a mispricing in the stock, they must not sit on their haunches but should aggressively grab the stock.

“One of the things about investing is if you find companies that may go up three times or five times or 10 times, what probably is also the case is that they are trading really cheap and so they have a high margin of safety. A high margin of safety comes with high returns and we are not in a business where it is high risk high return. If you follow value investing, this is a business which should be low risk and high return,” the duo said.

“… every so often there is something that is an anomaly or it is mispriced or people cannot see it. That is when you step up and hit the ball for a six,” they further advised.

Are Rain Industries and Balaji Amines “5x gain” stocks?

At this stage, we have to turn our attention back to practical issues from theory and ask whether the two stocks in which Mohnish Pabrai has heavily invested, namely, Rain Industries and Balaji Amines, have the potential to offer the coveted “5x gain” that Mohnish keeps talking about.

I have earlier drawn attention to the research reports from leading experts regarding both stocks (see Mohnish Pabrai’s Fav Stocks Have Huge Upside Potential: Experts).

Prima facie, it does appear that both stocks are powerhouses and have the ability to shower hefty gains on their shareholders. However, only time will tell whether these stocks will become magnificent 5x multibaggers in the foreseeable future!