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December 27, 2010

Gurus : Mohanish Pabrai (Forbes Interview)

Forbes: You are one of the noted value investors, one of those who is an admirer of Warren Buffett. What did you take from Warren Buffett? And what do you do differently from Warren Buffett? You're not a clone.
Pabrai: Well, you know, we will never have another Warren. I think Warren is a very unique person. And also, I think that his investing prowess is so strong that many of his other attributes and, I would say, his other qualities get ignored. I believe thebest things about Warren have nothing to do with investing. But they have everything to do with leading a great life. So many ofthe things, I think, most of the great things I've taken from Warren have more to do with life than investing.
Forbes: Such as?
Pabrai: Well, such as, you know, how to raise a family, interaction with friends, the importance of keeping your ego in check.You know, humility. Just a whole bunch of different attributes. The importance of candor, the importance of integrity. Just all these, the soft skills that are very important in life.
Forbes: They do interconnect. Now, in terms of how you approach an investment, you, I think, probably pay more attention to intangibles than perhaps Warren Buffett or Ben Graham might have done.
Pabrai: Well, Warren pays attention to intangibles, but Ben Graham was very much a tangible guy. And yeah, so we're looking at the qualitative as well as the quantitative. And yeah, so I would say that one way to look at that is to consider what CharlieMunger would call his latticework of mental models. So when you look at a business, look at it in a broader context of how itfits into the world. And sometimes, if you can see it in a light that the world is not seeing it in, that can give you an edge.
Forbes: Munger also said, "You have three choices: yes, no, or too difficult." You subscribe to that too.
Pabrai:
 That's right. And 98% is too difficult.
Find Deep Moats
Forbes:
So that gets to knowing your areas of competency. You share Warren Buffett's antipathy to technology. Not that you
dislike it, but you just don't feel you're going to bring value added there.
Pabrai:Yeah, you know, my degrees are in computer engineering. I spent a lot of time in the tech industry. And I like to say that I don't invest in tech because I spent time in it. And I saw firsthand that the durability of technology moats is many times an oxymoron.
Forbes:Now quickly define moats, in terms of a business that keeps the competition away.
Pabrai:Well, you know, if you talk to Michael Porter, he would give you five books on what is meant by, you know, strategy and competitive advantage and durable competitive advantage. And if you talk to Warren and Charlie, they would just say it's a moat. And they'd break it down to one word. But basically it's the ability of a business to have some type of an enduring competitive advantage that allows it to earn a better-than-average rate of return over an extended period of time. And so some businesses have narrow moats. Some have broad moats. Some have moats that are deep but get filled up pretty quickly. So what you want is a business that has a deep moat with lots of piranha in it and that's getting deeper by the day. That's a great
business.
orbes: So summing up in terms of what do you think do you bring to value investing that others perhaps don't, that give you a unique edge?
Pabrai: I think the biggest edge would be attitude. So you know, Charlie Munger likes to say that you don't make money when you buy stocks. And you don't make money when you sell stocks. You make money by waiting. And so the biggest, the single biggest advantage a value investor has is not IQ; it's patience and waiting. Waiting for the right pitch and waiting for many years for the right pitch.
Forbes: So what's that saying of Pascal that you like about just sitting in a room?
Pabrai: Yeah. "All man's miseries stem from his inability to sit in a room alone and do nothing." And all I'd like to do to adapt Pascal is, "All investment managers' miseries stem from the inability to sit alone in a room and do nothing."
Forbes: So you don't feel the need to pick 10 stocks a quarter or one stock a quarter, just what turns up?
Pabrai: You know, actually, I think that the way the investment business is set up, it's actually set up the wrong way. The correct way to set it up is to have gentlemen of leisure, who go about their leisurely tasks, and when the world is severely fearful is when they put their leisurely task aside and go to work. That would be the ideal way to set up the investment business.
Forbes: Does this tie into your ideas and other value investors' ideas of low risk, high uncertainty?
Pabrai: That's right. I mean, I think the low risk, high uncertainty is really something I borrowed from entrepreneurs, and you know, the Patels in India or the Richard Bransons of the world. Basically if you study entrepreneurs, there is a misnomer: People think that entrepreneurs take risk, and they get rewarded because they take risk. In reality entrepreneurs do everything they can to minimize risk. They are not interested in taking risk. They want free lunches and they go after free lunches. And so if you study any number of entrepreneurs, from Ray Kroc to, you know, Herb Schultz at Starbucks and to even Buffett and
Munger and so on, what you'll find is that they have repeatedly made bets which are low-risk bets, which have high-return possibilities. So they're not going high risk, high return. They're going low risk, high return.
And even with Bill Gates, for example. The total amount of capital that ever went into Microsoft was less than $50,000, between the time it started and today. That's the total amount of capital that went into the company. So Microsoft you cannot say was a high-risk venture because there was no capital deployed. But it had high uncertainty. Bill Gates could have gone bankrupt. Or Bill Gates could have ended up the wealthiest person on the Forbes 400. And he ended up at the extreme end of the bell curve, and that's fine. But he did not take risk to get there. He was comfortable with uncertainty. So entrepreneurs are great at dealing with uncertainty and also very good at minimizing risk. That's the classic great entrepreneur.
Low Risk, Low Capital
Forbes: This is your almost third career. And this idea you have on uncertainty and risk. You started a company. It worked. You sold it. You started another company. It did not work. What did you learn from that that gave you insights on investing that, those that had not been in the trenches, don't bring?
Pabrai: Well the first company took no capital and generated an enormous amount of capital for me. Then I got fat, dumb and happy and my second company, I put in a lot of capital.
Forbes: You thought you knew what you were doing.
Pabrai: And I violated the low risk, high uncertainty principle. I got my head handed to me. And I got that seared heavily in my
psyche. And now the third business, if you call Pabrai Funds a business--I call it a "gentleman of leisure" activity--but Pabrai Funds is, again, low risk, high uncertainty in the sense that there is no downside. It never took capital. So it's a great business.
Forbes: So as a gentleman of leisure, is that why you take a nap each day at 4 p.m.?
Pabrai:
 There's nothing better. Do you have a nap room?
Forbes:
 I wish.
Pabrai:
 You know, when I went to Warren's Berkshire headquarters last year, my friend Guy asked Warren, he said, "Warren, Mohnish has a nap room in his office. Do you have a nap room?" And Warren's answer was, "Yes." OK, so I was surprised. So I said, "Warren, you're telling me in Kiewit Plaza, there's a nap room for you." He says, "Yes." He says, "Not every day, but every once in a while, I need to go to sleep in the afternoon."
Forbes: Well there's something to that. My father called it having a conference.
Pabrai: That's right. No, it does wonders. I have a hard time getting past the day without the nap, so the nap is a must.
Forbes: So having those two experiences--no capital, then as you say, fat and happy and then you got your head handed to you--when you look at an equity, when you look at a possibility, what are those experiences, give what insight do you get from those experiences.
Pabrai: Well, the insight is the same, in the sense that I think that, you know, Warren says that I'm a better investor because I'm a businessman, and I'm a better businessman because I'm an investor. So the thing is that my experiences as a businessman have very direct, long-term positive impacts on me as an investor, because when I'm looking at an investment, I now look at it like the way I looked at my first business, which is, the first thing I'm looking at is, how can I lose money on this? And can I absolutely minimize my downside?
The upsides will take care of themselves. It's the downsides that one needs to worry about, which is why even the checklist becomes important. But so the important thing that value investors focus on is downside protection. And that's exactly what entrepreneurs focus on--what is my downside? So that is the, I would say, the crossover between entrepreneurship in investing, and value investing especially, is protecting your downside.
Pabrai's Fees
Forbes:
 Now you're a hedge fund manager, but you're unusual. First, your fee structure. Explain that.
Pabrai:
 Well you know, my fee structure, one of my attributes about a great investor is be a copycat. Do not be an innovator.
Forbes:
 What's it, pioneers take the arrows?
Pabrai:
 Yeah. When I started Pabrai Funds, I actually didn't know anything about the investing business. And the only, if you can call it a hedge fund, that I was familiar with was the Buffett partnerships. And when I looked at the Buffett partnerships, Ifound that Warren Buffett charged no management fees. He took 25% of the profits, after a 6% hurdle. And all of that made allthe sense in the world to me, because I felt it aligned my interests completely with my investors. So I said, "Why mess withperfection? Let's just mirror it." And that's what I did. And what I didn't realize at the time--it took me a few years to realizeit--is that that mirroring created an enormous moat for Pabrai Funds. Because the investors who joined me will never leave,because it's the first question they ask any other money manager they go to work for or they want to put money with is, "Whatis your fee structure?" When they hear the fee structure, they say, "I'm just going to stay where I am." And so first of all, it creates a moat where the existing investors do not want to leave. And the new ones who join the church are happy to join.
Forbes: You're also unusual in another way. You don't seem to go out of your way to woo institutional investors.
Pabrai: Yeah, I mean, I think I'm looking for people who want to invest their family assets for a long period of time. I really don't want investors who are looking at putting things into style buckets or going to look at allocations every quarter or might need to redeem in a year and those sorts of things. So their frameworks are very different. So in general--
Forbes: So someone who comes with you is a minimum of, what, two years, three years, what, before you allow them an exit?
Pabrai: Our exits are annual. So people can get out once a year. But what we suggest to them is to not invest if they don't have at least a five-year horizon. But we don't impose any, because people can have hardships. They can have all kinds of things happen.
Forbes: Now, low cost, one of the things that apparently institutional investors are flummoxed by is, it's you.
Pabrai: Our total expenses for running the funds, which the investors get charged for, is between 10 and 15 basis points a year. That's what they pay for, for all the accounting, audit, tax, administration and everything. They don't pay for my salary or my staff's salary. We take that out of the performance fees. And they only pay the performance fees after 6%. So what a deal.
Forbes: Now, you're not big on schmoozing investors.
Pabrai: You know, I think the thing is that every business ought to figure out who their ideal customer is.
And at Pabrai Funds, what I've found is that investors who do their own homework find me and do the research on me on their own, without any middlemen involved, and then invest in Pabrai Funds like Amazon--which is wire the money and send the forms--tend to be the best investors. In fact the investor base we have is mostly entrepreneurs who created their wealth  hemselves. And they're very smart. And they're in a wide range of industries. In fact, my analyst pool is my investor base. So Ihave investors in all kinds of industries. And when I'm looking at investment ideas in particular industries, I can call them. And Iget the best analysts at the best price with no conflict of interest. So it works out great.
Forbes: Free. That sounds really good. They pay you.
Pabrai: Yeah, exactly. It's great
Forbes: You're not even registered with the SEC?
Pabrai: I think the hedge funds so far have not had to. I don't know if the rules will change. If the rules change, of course, we'll follow the rules. But you know, we have audits by Pricewaterhouse. We have to report 13fs to the SEC. So I think there's plenty of disclosure and transparency.
Forbes: You also don't engage in things like short-selling.
Pabrai: You know, why would you want to take a bet, Steve, where your maximum upside is a double and your maximum downside is bankruptcy? It never made any sense to me, so why go there?
Forbes: You focus on a handful of individual investors, maybe institutional investors, but people who know you, are with you.
Pabrai:Right.
Forbes: You're not part of a formula, not spit out of a computer.
Pabrai:
 That's right.
Use Index Funds
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 thelow-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. Buteven the 10% or 20% who do, only one in 200 managers outperforms the index consistently by more than 3% a year. So thechances that an individual investor will find someone who beat the index by more than 3% a year is less than 1%. It's half apercent. 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'redone. 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 dothis for a long time and you'll be fine.
Don't Go in the Roach Motel
Forbes: On TV when these folks make recommendations--you compare it to if you buy something that you heard somebody recommend on TV as going into the roach motel. Can you please explain?
Pabrai: Well you know, you remember those ads that ran where the roaches check in.
Forbes:
Yup.
Pabrai:
 But they never check out. So the thing is, you watch some talking head on TV. And he tells you, "Go buy whatever company, Citigroup." When its price gets cut in half, he's nowhere to be found. And now you're like that roach in the roach motel and you don't know what to do. You don't know whether you should hang on or sell or stay. So the only reason--
Forbes: Or if it goes up, do I get out? Do I wait?
Pabrai: Yeah, yeah. If it goes up 10% or 50% or 100%, what are you supposed to do? Do you want to go for long-term gain, short-term gains? Basically you have no road map. So the only way one should buy stocks is if you understand the underlying business. You stay within the circle of competence. You buy businesses you understand. And if you understand the business, you understand what they're worth. And that's the only reason you are to buy a stock.
The Chinese Books
Forbes: And looking around the world, you made mention I think in the past, if you want an index fund with the emerging markets, OK. But you have us take a skeptical eye to investing in other countries around the world. You don't preclude it, but you see some risks.
Pabrai: Well, you know, Steve, there's plenty of great opportunities in many countries. But I would say it's probably a no-brainer to avoid Russia, Zimbabwe. And even if you look at a place like China, which I think will create incredible amount of wealth for humanity in this century, the average Chinese company has three sets of books. You know, one for the government, and one for the owner's wife and one for the owner's mistress. And so the problem you have is you don't know which set of books you're looking at. And so I think in Chinese companies, or even in Indian companies, there you have to add another layer, which is you have to handicap the ethos of management. And that can get very hard, especially when someone like me is sitting in Irvine with naps in the afternoon, trying to figure that out. Forbes: You also say you don't think you get much talking to CEOs, because they're in the business of sales. Pabrai: Yeah, you know, the average CEO, first of all, the average public CEO is a person you'd be happy to have your daughter marry, any five of them. But they got to those positions because they have charisma and they are great salespeople.
Now you cannot lead, you cannot be a leader, without being an optimist. So CEOs are not deceitful. I think they are high-integrity people. But if you sit down with a high-charisma CEO of an oil company, and he knows everything about oil and you know nothing about oil, by the time you finish that meeting, you just want to run out and buy all the stock of his company that you can. And it's just not the right way to go about it. So you're better off not taking the meeting, but looking at what he's done over the last 10 or 15 or 20 years. So not being mesmerized by charisma will probably help you.
Forbes: And what areas are you looking at right now? You remember back in 1968, '69, we did a story on Buffett when he was fairly unknown. And he was getting out of the market, height of the bull market of the '60s. Five years later after the crash of '73, '74, we went out to see him again, to see what he was saying after the market had gone down 50%, 60%. And he politically incorrectly said that he felt like a sex maniac in a harem because of all the bargains around.
Pabrai:Right.
Forbes: You've probably had the same feeling a year ago. What do you see? How does the harem look now?
Pabrai: That's right. In 1969 Warren told you "I feel like a sex-starved man on a deserted island." And in '74, that deserted island had become a harem. Well nowadays, we're twiddling our thumbs. It's good that I enjoy playing racquetball and bridge and so on. So there's a lot of bridge. There's a lot of racquetball. And you know, I have an eye out on the markets, but there's just not a whole lot of value presently. But value can show up tomorrow, for example. So we're not in a hurry. Happy to have a leisurely lifestyle and wait for the game to come to us. Make Checklists
Forbes: So in the first quarter of 2010, did you add any positions?
Pabrai: Yeah, actually, we did. We did find. In fact, there's one I'm buying right now. But I found two businesses, but they're anomalies. They were just, you know, businesses that had distress in them because of specific factors. And I think we'll do very well on both of them. They'll go nameless here. But no, I think, for example, in the fourth quarter of 2008 or the first quarter of 2009, you could have just thrown darts and done well. And that is definitely not the case today.
Forbes: And finally, telling you about mistakes, one of the things I guess an investor has to realize, they cannot control the universe. Delta Financial: You had done the homework, you fell and then events took it away from you.
Pabrai: Well Delta Financial was a full loss for the firm, for the fund. We lost 100% of our investment. It was a company that went bankrupt. And we've learned a lot of lessons from Delta. And one of the lessons was that Delta was, in many ways, a very highly levered company and they were very dependent on a functioning securitization market. And when that market shut down, they were pretty much out of business. And they were caught flat-footed. And so there's a number of lessons I've obviously learned from Delta. It's easier to learn the lessons when you don't take the hits in your own portfolio. But when you take the hits in your own portfolio, those lessons stay with you for a long time.
Forbes: So that gets to, you're a great fan of The Checklist Manifesto. And you now have checklists. You said one of the key things is mistakes, in terms of a checklist, so you don't let your emotions get in the way of analyzing. What are some of the mistakes on your checklist now that you go through systematically, even if your gut says, "This is great. I want to do it."
Pabrai: Yeah, so the checklist I have currently has about 80 items on it. And even though 80 sounds like a lot, it doesn't take a long time. It takes about 30 minutes to go through the checklist. What I do is when I'm starting a business, I go through my normal process of analyzing the business. When I'm fully done and I'm ready to pull the trigger, that's when I take the business to the checklist. And I run it against the 80 items. And what happens the first time when I run it, there might be seven or eight questions that I don't know the answer to, which is great, which what that means is, "Listen dummy, go find out the answer to these eight questions first." Which means I have more work to do. So I go off again to find those answers. When I have those answers, I come back and run the checklist again. And any business that I look at is going to have some items on which the checklist raises red flags. But the good news is that you're looking in front of you with all your facilities at the range of things that could possibly cause a problem. And when you look at that list, you can also compare it to how those factors correlate with the rest of your portfolio. And at that point, kind of, you have a go, no-go point, where you can say, "I'm comfortable with these risk factors here. I'm comfortable with probabilities. And I'll go ahead with it." Or you can say, "I'm just going to take a pass." And one of the things that came out of running the checklist was I used to run a 10x10 portfolio, which is when I'd make a bet, it was typically 10% of assets. And after I incorporated the checklist and I started to see all the red flags, I changed my allocation. So the typical allocation now at Pabrai Funds is 5%. And we'll go as low as 2%, if we are doing a basket bet. And once in a blue moon, we'll go up to 10%. In fact I haven't done a 10% investment in a long time. And so the portfolio has become more names than it used to have. But since we started running the checklists, which is about 18 months ago, so far it's a zero error rate. And in the last 18 months, it's probably been the most prolific period of making investments for Pabrai Funds.We made a huge number of investments, more than any other period, any other 18-month period in our history. So with more
activity so far, and it's a very short period, we have a much lower error rate. I know in the future we will make errors. But I know those errors, the rate of errors will be much lower. And this is key. The thing is that Warren says, "Rule No. 1: Don't lose money. Rule No. 2: Don't forget rule No. 1." OK, so the key to investing is downside protection. The upsides will take care of themselves. But you have to make sure that your losers are few and far between. And the checklist is very central to that. Forbes: Can you give a couple of the things that are on your 80 [item] checklist?
Pabrai: Oh yeah, sure. The checklist was created, looking at my mistakes and other investors' mistakes. So for example, there's questions like, you know, "Can this business be decimated by low-cost competition from China or other low-cost countries?" That's a checklist question. Another question is, "Is this a win-win business for the entire ecosystem?" So for example, if there's some company doing, you know, high-interest credit cards and they make a lot of money, that's not exactly, you know, helping society. So you might pass on that. Also, a liquor company or tobacco company, those can be great businesses, but in my book, I would just pass on those. Or a gambling business, and so on.So the checklist will kind of focus you more toward playing center court rather than going to the edge of the court. And there's a whole set of questions on leverage. For example, you know, how much leverage? What are the covenants? Is it recourse or non-recourse? There's a whole bunch of questions on management, on management comp, on the interests of management. You know, just a whole--on their historical track records and so on. So there's questions on unions, on collective bargaining. So you know, and all of these questions are not questions I created out of the blue. What I did is I looked at businesses where people had lost money. I looked at Dexter Shoes, where Warren Buffett lost money. And he lost it to low-cost Chinese competition. So that led to the question. And I looked at CORT Furniture, which was a Charlie Munger investment. And that was an investment made at the peak of the dot-com boom, where they were doing a lot of office furniture rentals. And the question was, "Are you looking at normalized earnings or are you looking at boom earnings?" And so that question came from there. So the checklist questions, I think, are very robust, because they're based on real-world arrows people have taken in the back.
Forbes: Terrific. Mohnish, thank you.

December 22, 2010

Gurus :- Warren Buffett Biography

Warren Edward Buffett was born on August 30, 1930 to his father Howard, a stockbroker-turned-Congressman. The only boy, he was the second of three children, and displayed an amazing aptitude for both money and business at a very early age. Acquaintances recount his uncanny ability to calculate columns of numbers off the top of his head - a feat Warren still amazes business colleagues with today.
At only six years old, Buffett purchased 6-packs of Coca Cola from his grandfather's grocery store for twenty five cents and resold each of the bottles for a nickel, pocketing a five cent profit. While other children his age were playing hopscotch and jacks, Warren was making money. Five years later, Buffett took his step into the world of high finance. At eleven years old, he purchased three shares of Cities Service Preferred at $38 per share for both himself and his older sister, Doris. Shortly after buying the stock, it fell to just over $27 per share. A frightened but resilient Warren held his shares until they rebounded to $40. He promptly sold them - a mistake he would soon come to regret. Cities Service shot up to $200. The experience taught him one of the basic lessons of investing: patience is a virtue.

Warren Buffett's Education

In 1947, a seventeen year old Warren Buffett graduated from High School. It was never his intention to go to college; he had already made $5,000 delivering newspapers (this is equal to $42,610.81 in 2000). His father had other plans, and urged his son to attend the Wharton Business School at the University of Pennsylvania. Buffett stayed two years, complaining that he knew more than his professors. When Howard was defeated in the 1948 Congressional race, Warren returned home to Omaha and transferred to the University of Nebraska-Lincoln. Working full-time, he managed to graduate in only three years.
Warren Buffett approached graduate studies with the same resistance he displayed a few years earlier. He was finally persuaded to apply to Harvard Business School, which, in the worst admission decision in history, rejected him as "too young". Slighted, Warren applied to Columbia where famed investors Ben Graham and David Dodd taught - an experience that would forever change his life.

Ben Graham - Buffett's Mentor

Ben Graham had become well known during the 1920's. At a time when the rest of the world was approaching the investment arena as a giant game of roulette, he searched for stocks that were so inexpensive they were almost completely devoid of risk. One of his best known calls was the Northern Pipe Line, an oil transportation company managed by the Rockefellers. The stock was trading at $65 a share, but after studying the balance sheet, Graham realized that the company had bond holdings worth $95 for every share. The value investor tried to convince management to sell the portfolio, but they refused. Shortly thereafter, he waged a proxy war and secured a spot on the Board of Directors. The company sold its bonds and paid a dividend in the amount of $70 per share.
When he was 40 years old, Ben Graham published Security Analysis, one of the greatest works ever penned on the stock market. At the time, it was risky; investing in equities had become a joke (the Dow Jones had fallen from 381.17 to 41.22 over the course of three to four short years following the crash of 1929). It was around this time that Graham came up with the principle of "intrinsic" business value - a measure of a business's true worth that was completely and totally independent of the stock price. Using intrinsic value, investors could decide what a company was worth and make investment decisions accordingly. His subsequent book, The Intelligent Investor, which Warren celebrates as "the greatest book on investing ever written", introduced the world to Mr. Market - the best investment analogy in history.

Through his simple yet profound investment principles, Ben Graham became an idyllic figure to the twenty-one year old Warren Buffett. Reading an old edition of Who's Who, Warren discovered his mentor was the Chairman of a small, unknown insurance company named GEICO. He hopped a train to Washington D.C. one Saturday morning to find the headquarters. When he got there, the doors were locked. Not to be stopped, Buffett relentlessly pounded on the door until a janitor came to open it for him. He asked if there was anyone in the building. As luck (or fate) would have it, there was. It turns out that there was a man still working on the sixth floor. Warren was escorted up to meet him and immediately began asking him questions about the company and its business practices; a conversation that stretched on for four hours. The man was none other than Lorimer Davidson, the Financial Vice President. The experience would be something that stayed with Buffett for the rest of his life. He eventually acquired the entire GEICO company through his corporation, Berkshire Hathaway.

Flying through his graduate studies at Columbia, Warren Buffett was the only student ever to earn an A+ in one of Graham's classes. Disappointingly. both Ben Graham and Warren's father advised him not to work on Wall Street after he graduated. Absolutely determined, Buffett offered to work for the Graham partnership for free. Ben turned him down. He preferred to hold his spots for Jews who were not hired at Gentile firms at the time. Warren was crushed.
Warren Buffett Returns Home

Returning home, he took a job at his father's brokerage house and began seeing a girl by the name of Susie Thompson. The relationship eventually turned serious and in April of 1952 the two were married. They rented out a three-room apartment for $65 a month; it was run-down and served as home to several mice. It was here their daughter, also named Susie, was born. In order to save money, they made a bed for her in a dresser drawer.
During these initial years, Warren's investments were predominately limited to a Texaco station and some real estate, but neither were successful. It was also during this time he began teaching night classes at the University of Omaha (something that wouldn't have been possible several months before. In an effort to conquer his intense fear of public speaking, Warren took a course by Dale Carnegie). Thankfully, things changed. Ben Graham called one day, inviting the young stockbroker to come to work for him. Warren was finally given the opportunity he had long awaited.

Warren Buffett Goes to Work for Ben Graham

The couple took a house in the suburbs of New York. Buffett spent his days analyzing S&P reports, searching for investment opportunities. It was during this time that the difference between the Graham and Buffett philosophies began to emerge. Warren became interested in how a company worked - what made it superior to competitors. Ben simply wanted numbers whereas Warren was predominately interested in a company's management as a major factor when deciding to invest, Graham looked only at the balance sheet and income statement; he could care less about corporate leadership. Between 1950 and 1956, Warren built his personal capital up to $140,000 from a mere $9,800. With this war chest, he set his sights back on Omaha and began planning his next move.
On May 1, 1956, Warren Buffett rounded up seven limited partners which included his Sister Doris and Aunt Alice, raising $105,000 in the process. He put in $100 himself, officially creating the Buffett Associates, Ltd. Before the end of the year, he was managing around $300,000 in capital. Small, to say the least, but he had much bigger plans for that pool of money. He purchased a house for $31,500, affectionately nicknamed "Buffett's Folly", and managed his partnerships originally from the bedroom, and later, a small office. By this time, his life had begun to take shape; he had three children, a beautiful wife, and a very successful business.

Over the course of the next five years, the Buffett partnerships racked up an impressive 251.0% profit, while the Dow was up only 74.3%. A somewhat-celebrity in his hometown, Warren never gave stock tips despite constant requests from friends and strangers alike. By 1962, the partnership had capital in excess of $7.2 million, of which a cool $1 million was Buffett's personal stake (he didn't charge a fee for the partnership - rather Warren was entitled to 1/4 of the profits above 4%). He also had more than 90 limited partners across the United States. In one decisive move, he melded the partnerships into a single entity called "Buffett Partnerships Ltd.", upped the minimum investment to $100,000, and opened an office in Kiewit Plaza on Farnam street.

In 1962, a man by the name of Charlie Munger moved back to his childhood home of Omaha from California. Though somewhat snobbish, Munger was brilliant in every sense of the word. He had attended Harvard Law School without a Bachelor's Degree. Introduced by mutual friends, Buffett and Charlie were immediately drawn together, providing the roots for a friendship and business collaboration that would last for the next forty years.

Ten years after its founding, the Buffett Partnership assets were up more than 1,156% compared to the Dow's 122.9%. Acting as lord over assets that had ballooned to $44 million dollars, Warren and Susie's personal stake was $6,849,936. Mr. Buffett, as they say, had arrived.

Wisely enough, just as his persona of success was beginning to be firmly established, Warren Buffett closed the partnership to new accounts. The Vietnam war raged full force on the other side of the world and the stock market was being driven up by those who hadn't been around during the depression. All while voicing his concern for rising stock prices, the partnership pulled its biggest coup in 1968, recording a 59.0% gain in value, catapulting to over $104 million in assets.

The next year, Warren went much further than closing the fund to new accounts; he liquidated the partnership. In May 1969, he informed his partners that he was "unable to find any bargains in the current market". Buffett spent the remainder of the year liquidating the portfolio, with the exception of two companies - Berkshire and Diversified Retailing. The shares of Berkshire were distributed among the partners with a letter from Warren informing them that he would, in some capacity, be involved in the business, but was under no obligation to them in the future. Warren was clear in his intention to hold onto his own stake in the company (he owned 29% of the Berkshire Hathaway stock) but his intentions weren't revealed.
Warren Buffett Gains Control of Berkshire Hathaway

Buffett's role at Berkshire Hathaway had actually been somewhat defined years earlier. On May 10, 1965, after accumulating 49% of the common stock, Warren named himself Director. Terrible management had run the company nearly into the ground, and he was certain with a bit of tweaking, it could be run better. Immediately Mr. Buffett made Ken Chace President of the company, giving him complete autonomy over the organization. Although he refused to award stock options on the basis that it was unfair to shareholders, Warren agreed to cosign a loan for $18,000 for his new President to purchase 1,000 shares of the company's stock.
Two years later, in 1967, Warren asked National Indemnity's founder and controlling shareholder Jack Ringwalt to his office. Asked what he thought the company was worth, Ringwalt told Buffett at least $50 per share, a $17 premium above its then-trading price of $33. Warren offered to buy the whole company on the spot - a move that cost him $8.6 million dollars. That same year, Berkshire paid out a dividend of 10 cents on its outstanding stock. It never happened again; Warren said he "must have been in the bathroom when the dividend was declared".

In 1970, Buffett named himself Chairman of the Board of Berkshire Hathaway and for the first time, wrote the letter to the shareholders (Ken Chace had been responsible for the task in the past). That same year, the Chairman's capital allocation began to display his prudence; textile profits were a pitiful $45,000, while insurance and banking each brought in $2.1 and $2.6 million dollars. The paltry cash brought in from the struggling looms in New Bedford, Massachusetts had provided the stream of capital necessary to start building Berkshire.

A year or so later, Warren Buffett was offered the chance to buy a company by the name of See's Candy. The gourmet chocolate maker sold its own brand of candies to its customers at a premium to regular confectionary treats. The balance sheet reflected what Californians already knew - they were more than willing to pay a bit "extra" for the special "See's" taste. The businessman decided Berkshire would be willing to purchase the company for $25 million in cash. See's owners were holding out for $30 million, but soon conceded. It was the biggest investment Berkshire or Buffett had ever made.

Following several investments and an SEC investigation (after causing a merger to fail, Warren and Munger offered to buy the stock of Wesco, the target company, at the inflated price simply because they thought it was "the right thing to do". Not surprisingly, the government didn't believe them), Buffett began to see Berkshire's net worth climb. From 1965 to 1975, the company's book value rose from $20 per share to around $95. It was also during this period that Warren made his final purchases of Berkshire stock (when the partnership dolled out the shares, he owned 29%. Years later, he had invested more than $15.4 million dollars into the company at an average cost of $32.45 per share). This brought his ownership to over 43% of the stock with Susie holding another 3%. His entire fortune was placed into Berkshire. With no personal holdings, the company had become his sole investment vehicle.

In 1976, Buffett once again became involved with GEICO. The company had recently reported amazingly high losses and its stock was pummeled down to $2 per share. Warren wisely realized that the basic business was still in tact; most of the problem were caused by an inept management. Over the next few years, Berkshire built up its position in this ailing insurer and reaped millions in profits. Benjamin Graham, who still held his fortune in the company, died in in September of the same year, shortly before the turnaround. Years later, the insurance giant would become a fully owned subsidiary of Berkshire.

It was shortly thereafter one of the most profound and upsetting events in Buffett's life took place. At forty-five, Susan Buffett left her husband - in form. Although she remained married to Warren, the humanitarian / singer secured an apartment in San Francisco and, insisting she wanted to live on her own, moved there. Warren was absolutely devastated; throughout his life, Susie had been "the sunshine and rain in my [his] garden". The two remained close, speaking every day, taking their annual two-week New York trip, and meeting the kids at their California Beach house for Christmas get-togethers. The transition was hard for the businessman, but he eventually grew somewhat accustomed to the new arrangement. Susie called several women in the Omaha area and insisted they go to dinner and a movie with her husband; eventually, she set Warren up with Astrid Menks, a waitress. Within the year, she moved in with Buffett, all with Susie's blessing.
Warren Buffett Wants Two Nickels to Rub Together

By the late '70s, the his reputation had grown to the point that the rumor Warren Buffett was buying a stock was enough to shoot its price up 10%. Berkshire Hathaway's stock was trading at more than $290 a share, and Buffett's personal wealth was almost $140 million. The irony was that Warren never sold a single share of his company, meaning his entire available cash was the $50,000 salary he received. During this time, he made a comment to a broker, "Everything I got is tied up in Berkshire. I'd like a few nickels outside."
This prompted Warren to start investing for his personal life. According to Roger Lowenstein's "Buffett", Warren was far more speculative with his own investments. At one point he bought copper futures which was unadulterated speculation. In a short time, he had made $3 million dollars. When prompted to invest in real estate by a friend, he responded "Why should I buy real estate when the stock market is so easy?"

Berkshire Hathaway Announces Charitable Giving Program

Later, Buffett once again showed his tendency of bucking the popular trend. In 1981, the decade of greed, Berkshire announced a new charity plan which was thought up by Munger and approved by Warren. The plan called for each shareholder to designate charities which would receive $2 for each Berkshire share the stockholder owned. This was in response to a common practice on Wall Street of the CEO choosing who received the company's hand-outs (often they would go to the executive's schools, churches, and organizations). The plan was a huge success and over the years the amount was upped for each share. Eventually, the Berkshire shareholders were giving millions of dollars away each year, all to their own causes. The program was eventually discontinued after associates at one of Berkshire's subsidiaries, The Pampered Chef, experienced discrimination because of the controversal pro-choice charities Buffett chose to allocate his pro-rated portion of the charitable contribution pool. Another important event around this time was the stock price which hit $750 per share in 1982. Most of the gains could be attributed to Berkshire's stock portfolio which was now valued at over $1.3 billion dollars.

Warren Buffett Buys Nebraska Furniture Mart, Scott Fetzer and an Airplane for Berkshire Hathaway

For all the fine businesses Berkshire had managed collect, one of the best was about to come under its stable. In 1983, Warren Buffett walked into Nebraska Furniture Mart, the multi-million dollar furniture retailer built from scratch by Rose Blumpkin. Speaking to Mrs. B, as local residents called her, Buffett asked if she would be interested in selling the store to Berkshire Hathaway. Blumpkin's answer was a simple "yes", to which she responded she would part for "$60 million". The deal was sealed on a handshake and one page contract was drawn up. The Russian-born immigrant merely folded the check without looking at it when she received it days later.

Scott & Fetzer was another great addition to the Berkshire family. The company itself had been the target of a hostile takeover when an LPO was launched by Ralph Schey, the Chairman. The year was 1984 and Ivan Boesky soon launched a counter offer for $60 a share (the original tender offer stood at $50 a share - $5 above market value). The maker of Kirby vacuum cleaners and World Book encyclopedia, S&F was panicking. Buffett, who had owned a quarter of a million shares, dropped a message to the company asking them to call if they were interested in a merger. The phone rang almost immediately. Berkshire offered $60 per share in cold, hard, cash. When the deal was wrapped up less than a week later, Berkshire Hathaway had a new $315 million dollar cash-generating powerhouse to add to its collection. The small stream of cash that was taken out of the struggling textile mill had built one of the most powerful companies in the world. Far more impressive things were to be done in the next decade. Berkshire would see its share price climb from $2,600 to as high as $80,000 in the 1990's.

In 1986, Buffett bought a used Falcon aircraft for $850,000. As he had become increasingly recognizable, it was no longer comfortable for him to fly commercially. The idea of the luxury was hard for him to adjust to, but he loved the jet immensely. The passion for jets eventually, in part, led him to purchase Executive Jet in the 90's.

The 80's went on with Berkshire increasing in value as if on cue, the only bump in the road being the crash of 1987. Warren, who wasn't upset about the market correction, calmly checked the price of his company and went back to work. It was representative of how he viewed stocks and businesses in general. This was one of "Mr. Market's" temporary aberrations. It was quite a strong one; fully one-fourth of Berkshire's market cap was wiped out. Unfazed, Warren plowed on.

I'll Take a Coke

A year later, in 1988, he started buying up Coca-Cola stock like an addict. His old neighbor, now the President of Coca-Cola, noticed someone was loading up on shares and became concerned. After researching the transactions, he noticed the trades were being placed from the Midwest. He immediately thought of Buffett, whom he called. Warren confessed to being the culprit and requested they don't speak of it until he was legally required to disclose his holdings at the 5% threshold. Within a few months, Berkshire owned 7% of the company, or $1.02 billion dollars worth of the stock. Within three years, Buffett's Coca-Cola stock would be worth more than the entire value of Berkshire when he made the investment.
Warren Buffett's Money and Reputation On the Line During the Solomon Scandal

By 1989, Berkshire Hathaway was trading at $8,000 a share. Buffett was now, personally, worth more than $3.8 billion dollars. Within the next ten years, he would be worth ten times that amount. Before that would happen, there were much darker times ahead (read The Solomon Scandal).
Warren Buffet at the Turn of the Millennium

During the remainder of the 1990's, the stock catapulted as high as $80,000 per share. Even with this astronomical feat, as the dot-com frenzy began to take hold, Warren Buffett was accused of "losing his touch". In 1999, when Berkshire reported a net increase of 0.5% per share, several newspapers ran stories about the demise of the Oracle. Confident that the technology bubble would burst, Warren Buffett continued to do what he did best: allocate capital into great businesses that were selling below intrinsic value. His efforts did not go unrewarded. When the markets finally did come to their senses, Warren Buffett was once again a star. Berkshire's stock recovered to its previous levels after falling to around $45,000 per share, and the man from Omaha was once again seen as an investment icon.

December 16, 2010

Gurus :- Mohnish Pabrai

Mohnish Pabrai currently manages Pabrai Investment Funds, which he founded in 1999. The fund has around half a billion dollars in assets under management. Pabrai went to the US in 1982 to do his undergrad in computer engineering. After that, he worked with Tellabs in Chicago. In 1990, he started his own company TransTech, an IT services/system integration business and ran that for around ten years, before starting Pabrai Investment Funds. He has written a book on investing, The Dhandho Investor: The Low-Risk Value Method to High Returns. Excerpts from an interview:
How did you get into investing business from information technology?
Around 1994 I heard about Warren Buffett for the first time accidentally. The first couple of biographies about him had just been published a year or two before that. I read those books and I was quite blown away by some data points that were coming out about him and the industry and so on. I didn’t have any experience or even education in the investment business. But I was very intrigued by it.
I started to invest in the public equity markets using Buffett’s model in 1994 and basically did extremely well, north of 70% a year, till about 1999. I was getting more and more interested in investment research and securities analysis and made a decision to leave my company. I brought in an outside CEO and decided that I would spend more time on investing and at the same time some friends of mine wanted me to manage their money for them. It started as a hobby in 1999 with about a million dollars from eight people. About a year later the business (TransTech) actually got sold, I wasn’t running it anyway, but I was completely cashed out. And then I thought that let’s make my hobby a real business, try to scale it up and get investors. We now manage about $500 million — ten years later.
How did you narrow down on Warren Bufett and value investing?Basically in 1994, when I read about Buffett, there were two things that stood out. One was that he had compounded money at a very high rate. If you are compounding at a high rate, even if you have a small amount of money — let’s say a million dollars — in thirty years you could have a billion dollars. So the idea of compounding at a rate above the market rate is an extremely fine notion because it can lead to enormous wealth creation. That was the first thing.
The second thing was that the way Buffett was compounding money at a rate higher than the market was based on a core wisdom which he stood for. If you are physicist, whether you believe in gravity or not, it will always impact you. Just like there are laws of physics, laws of gravity, there are laws of investing.
I noticed in 1994 that the mutual fund business had two things: one, they did not follow the laws of investing, and two, their results were affected by the fact that they did not follow the laws of investing.
For example, a basic law of investing is that you make very few bets, you don’t buy a hundred companies because you are not going to have an understanding of business. But if you look at mutual funds, that is not the way they operate.
So essentially, what you are saying is that investors should make fewer bets?
So you make few bets, you make big bets, infrequent bets and you only make bets when the odds are heavily in your favour. What I found very funny was that here is a guy (Buffett) who is telling you very much the approach to investing he follows, and this is like Newton telling you the laws of physics. The second thing is that the investment industry does not care about these laws, and their results reflect it.
The third conclusion I came to is, I said, OK, if what I am saying is right, what it means is that a person like myself, who has no experience in this industry, could come in and apply Buffett’s rules and do better than all these managers running all these funds. So I said, well, that hypothesis means nothing until you test it out. I had an asset sale take place of a part of my business in 1994, and I had about million dollars in cash, sitting with me for which I did not have any need for.
I decided I am going to take this million and put this on a twenty or thirty-year compounding engine. I was about 30 years old, I wanted to see if by the age of sixty I had my billion dollars. I started playing this thirty-year game in 1994, and basically I found that first of all, it was very enjoyable and second, that it’s been fifteen years now and the original hypothesis I had is absolutely correct — which is that the industry doesn’t get it, they still haven’t changed their ways, and there results reflect that.
What are the factors you look at before deciding to invest in a company? Can you give us an example?The first thing you got to look at is, “I am not buying a stock, but I am buying a business.” And you only buy the business if you were willing to buy the entire business if you had money for it. So, for example, if Reliance Industries has a market cap of $100 billion and you had a $300 billion, the question you would ask yourself is, would I buy the entire business for a $100 billion?
The first thing is that you are not buying pieces of paper, but you are buying an entire business. The second is that you ask yourself, do I understand the business? Do I truly understand how it will work, how it makes money, how will it do in the future?
Then the third thing is, if Reliance produces$3 billion a year cash flow and it trades for $100 billion, I have no intention of buying it at 33 times cash flow. It is like I have no interest in putting money in an account that pays 3% interest.
So I love Reliance, maybe, if the fair value of business is 15 times cash flow, which is $45 billion. And since I am cheapskate, I don’t want to buy it for more than half its fair value, so I just say to myself, that if it goes below $20 billion in value — or one-fifth the current price — then I will look at it again. In fact, that is the way to look at the Indian Sensex. You take all the Reliances, the Wipros and Infosyses of the world, chop their price by four, and that’s your entry price.
What has been your most successful stockpick till date?
You know that’s a very funny question. The most successful company I ever invested in is Satyam. I invested in 1995, and I was completely out by 2000. When I invested the stock was at Rs 40, and Satyam’s earnings at that time were about at Rs 12 a share, so you were buying a business for three-and-a-half times earnings. And the more interesting thing for me was that property the company had in Hyderabad exceeded the market capitalisation as it was carried at a value that was bought a long time ago.
The only reason I knew about Satyam was because I was in the IT services space. These guys had actually visited us to see if they could do business together. And I had been pretty impressed by the way the business operated and the people I had met.
I looked at it from my investment point of view after was amazed that such a business could trade at such a price. So I invested in Satyam. In 2000, it was trading at Rs 7,000, that is about a 150 times the price I bought it at. This was in the days before demat, and actually when I bought the stock with an account through Kotak that I had in Mumbai, I was given physical delivery of these shares that looked like tattered pieces of paper that were falling apart.
Satyam from less than a PE of 3 to more than PE of 100. I just said I am out of it because now I owned a bubble stock even though I did not buy it at bubble price. I sold my entire position within 5% of the peak. Within six months it had dropped from Rs 7,000 to Rs 1,000, and continued on the sidelines for a while. That was the best deal that I ever made.
I also happened to read somewhere that you wear shorts to work and do not as a matter of habit short stocks?
Well, I am wearing shorts right now … the math for for shorting is really bad. When you are long on a stock, as it goes down in price, the position is going against you and it becomes a smaller portion of your portfolio. In shorting, it is the other way around: if the short goes against you, it is going to become a larger position of your portfolio. When you short a stock, your loss potential is infinite; the maximum you can gain is double your value. So why will you take a bet where the maximum upside is a double and the maximum downside bankruptcy?
Also, any time you short a stock, you are hooked to a (stock price) quote machine for life support because you have to watch what is happening all the time. Many a times, when I am travelling in India, it could be several days when I don’t have a quote for any positions that I hold. So I don’t want to be a in a situation where I have an umbilical cord linked to some quote machine … and blood pressure going up and down.
Do you have investments in emerging markets like India and China or do you stick to the stocks in the US market?
I would say that most times a very large portion of our portfolio has a lot of exposure to the global market. I have (shares in) several companies in Canada. I own (shares in) one Chinese company and an Egyptian company, I don’t own any Indian companies right now, but I use to own Satyam. Also Pabrai Funds use to own Dr Reddy’s.
You have said in the past that investment ideas come to you by reading a lot…
An investor should think of himself as a gentleman of leisure. Don’t think that you are in some profession. You just think that you are a person who is focused on enjoying and living life well. If you focus on yourself as a gentleman of leisure what is going to happen is that you do not feel any compelling reason to act. It has been several months since I have bought any new stock. And that is not a problem because we went through a period in December when we bought ten stocks. The first thing is that we are in a profession were you don’t pay for activity, you get paid for being right. So there should be no compelling reason to act. Basically, the thing you do is you take out the reason to act.
The second thing you do is you focus on acquiring worldly wisdom. I read an enormous amount of stuff and relate to what different investment managers who I respect are saying. So, at times, things become no-brainers.
In the fourth quarter of last year, when everything was going to hell, one part of the market that went to extreme hell was commodity-related stocks. Commodity-related stocks absolutely got crushed. 95% down. 90% down. And if you simply keep in mind that you look at the growth rates of India and China, you can get an insight.
Through our foundation Dakshina I spend a good amount of time in rural India. I can see nuances about India, that most people would not see. You can see that the pressure on the few commodities in the earth’s crust is tremendous.
China has severe problems with fresh water and you really have big problems with agriculture with those type of water issues. When you have growth rates of 7-8%, people will want to eat the best. Generally it is proven that protein consumption climbs very high when economies do well. It is absolutely a given that 10 years from now the amount of agriculture and protein needed will be much higher from today. And getting there will not be easy.
So the thing is there are certain businesses that serve as toll bridges in that space. For example, one toll bridge is if you look at Latin America. It has a lot of land and it is flooded with fresh water rivers. South America can basically take that land and convert it into producing corn and soybean or whatever and export the hell out of it to China. And that is exactly what will end up happening. Latin American agricultural companies with large land holdings today are not excessively priced, they are very cheap. But there is absolutely no way for India and China to satisfy the consumption demand that is coming without going to Latin America. So we will just own the toll bridges and wait.
How much of Warren Buffett’s success can be attributed to his investment prowess and how much to the fact that he is Warren Bufett?
Well the thing is you could have invested even after Buffett had invested and you could have made six times the money out of it.
In fact there are a couple of professors in Ohio, who studied any stock that Warren Buffett bought, if you bought on the last day of the month, when it was public that he owned that stock, and you sold it after it was public that he had started selling it, you would have generated north of 20% annual rate of return.
I would say that we will never see another Warren Buffett. Just like we will never see any Albert Einstein or another Mahatma Gandhi. Buffett is a very unique individual. His skillsets outside of investment are phenomenal but they get dwarfed by his investing skills. The main thing that makes Warren Buffett Warren Buffett is that he is a learning machine who has worked really hard for, let’s us say seventy years, and is continuously learning every day.
So the thing is if you want to be like Buffett, there is no short cut. First of all, you have to be deeply interested in investing and you have to be very willing spending tens of hours, hundreds of hours, reading the minutiae. There is a very famous value investor called Seth Klarman. He is into horse racing. And his famous horse is called Read the Footnotes.

Source :- DNA India

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December 5, 2010

Value Pick 2 : Mac Charles (India) Ltd

Note : SOLD ALL Holding  with no loss and no profit . No more interested in this type of companies.
I got idea of Mac Charles (India) Ltd , when I was going trough research report of CRISIL on “Navin Fluorine International Ltd” and “Savera Industries Limited” .  Savera has already moved up lot so I skipped it  . Navin Fluorine looked good and cheap at first glance , but after analyzing annual report I felt probably minority shareholder was taken on ride by promoter. This is Mafatlal group of company. Company has invested in group companies and written off some of amounts. If a company invest or give unsecure interest free loan to group companies(not subsidiary company) then promoter does not lose anything , but what minority shareholder get in return? Write – off ? CRISIL is number 1 research credit ratings organization in india , we expect from CRISIL to provide detail regarding prompters attitude toward minority shareholder , mainly corporate governance track record. In case of Navin CRISIL has mentioned “As part of the scheme of rehabilitation of the BIFR, Navin was mandated to settle the secured liabilities of MIL. Navin has also advanced money from time to time to settle working capital and other secured liabilities of MIL. However, as of March 2010, all the secured liabilities have been settled by Navin, inter-company advances to group companies are decreasing and we believe they are likely to be discontinued “ But not mentioned what minority shareholder lost and gain because of scheme of rehabilitation till date .
           Come back to my pick Mac Charles (India) Ltd  .  Mac Charles (India) Ltd is nothing but Hotel Le Meridien of Banglore .

Company Background :- Kapi Investment Inc Limited is the holding  company of Mac Charles (India)  Limited. Promoter group holds almost 75 % equity .Mac Charles (India) Ltd had signed the franchise agreement with Le  Meridien in 1997 .
Category      :-  5 Star
Access            :- 32 kms from New International Airport, 2 kms from City Railway Station, 2 kms from Majestic Bus Stand.
Total rooms & suites – 195 (Deluxe – 55, Executive suites - 8, Deluxe suites - 3, Le Royal Club rooms – 110 & Le Royal Club suites - 19).
Banquet halls :-
·        The Orchid
·        The Dominion
·        Embassy
·        Utsav
·        Senate
·        Coronet
Mac Charles (India) Ltd regularly acquired/invested in hotel and other properties like Bramha Bazaz Hotels Ltd (2001) , Vaswani Properties Pvt. Ltd and Vaswani Investments and Holdings Pvt. Ltd (2002).
Last year Mac Charles (India) Ltd has invested 100% share capital (Rs 7.45 cr) in Messrs. NEDSTAR HOTELS PRIVATE LIMITED (presently known as AIRPORT GOLF VIEW HOTELS & SUITES PRIVATE LIMITED) , which is now100% subsidiary company of Mac Charles Ltd. Get more detail of GOLF view from http://golfviewhotelsuites.com/index.html . Deal looks bit expensive considering AIRPORT GOLF VIEW is not profitable but I believe qualified, efficient & experienced management of Mac Charles (India) Ltd will make it profitable soon.
Mac Charles had 3.0 MW (1.50 MW each ) Wind Turbine Generators which generate electricity of about 1.15 crore units p.a. of green power which is being partially utilized for captive consumption of the Hotel and the balance units generated is being sold to Govt. of Karnataka. This existing Wind Turbine generated revenue around 2 cr in the last year . Mac Charles (India) Ltd has commissioned additional 2.10 MW Wind Turbine Generator on 30.03.2010 , which will start generating revenue from current fiscal . So, total current capacity of Mac Charles (India) Ltd is 5.10 MW. This additional capacity will generate additional revenue of around 3cr/year with some tax benefits (Karnataka gives 5 year tax holiday) for Mac Charles (India) Ltd.

Why Value Buy: - At closing price of 245.65 on 3rd  dec 2010 , market cap of Mac Charles (India) Ltd is around 162 cr . Mac Charles (India) Ltd has investment value around 91 cr in MF and stocks on 31st  March 2010. List of stock is too long , you can get complete list from annual report of Mac Charles (India) Ltd. You can download annual report from BSE site . Go to http://www.bseindia.com/bseplus/StockReach/AdvanceStockReach.aspx?scripcode=507836 and now click on "Filing & Other Info" section/tab. Here I am providing list of few stocks with major investment
·                                            ·        Reliance Industries Ltd
·        Sobha Developers Ltd
·        Purvankara Projects
·        Indiabulls Financial Services
Mac Charles (India) Ltd has total current asset of Rs. 77.37 cr (77,36,94,859)  ( inventory 60,02,670 + SUNDRY DEBTORS 1,55,21,941 + CASH 3,33,60,769 + LOANS & ADVANCES(including advance tax) 71,88,09,479)
Mac Charles (India) Ltd has total current liabilities & provisions of Rs. 33.81 cr (33,80,77,907) .
Net Current asset is 43.56 Cr.
Investment + Current Asset is 133.50 Cr.
So we are getting Mac Charles (India) Ltd (which is having 5 star hotel Le Meridien in Banglore spread across 3 acres in prime area, other properties , golf view hotel  and Wind mill which will generate revenue of at least 5 Cr per year and may be expandable)  effectively in less than 30 cr ( 162cr- 133.50cr) . Even company’s average cash flow from operation is 39 cr for last 4 years including recession time.
Additionally, Mac Charles (India) Ltd is having good track record of paying dividend. On current market price of Rs. 245 dividend yield is quite impressive at 4.5 %

Corporate Governance:-
A.
Mac Charles (India) Ltd has entered into an agreement for purchase of immovable property being commercial office space of 58000 sq.ft. with the Developer in Bangalore. Towards this, an advance of Rs.35 Crores has been paid by Mac Charles (India) Ltd. Subsequently, there was a delay in commencement of the project. The above referred agreement entitles the Mac Charles (India) Ltd to take appropriate action with regard to this agreement for which the consent of the developer is deemed to have been given. Accordingly, Mac Charles (India) Ltd relinquished its rights to the extent of 29000 sq.ft. in the previous year for a consideration of Rs.21,22,13,1207- of which a sum of Rs.3,72,13,1207-has already been received by Mac Charles (India) Ltd and during the year Mac Charles (India) Ltd has decided to relinquish its balance rights in the said agreement to the extent of 29000 sq.ft. for a consideration of Rs.23,99,25,000/- of which a sum of Rs.6,49,25,000/- has already been received by the Mac Charles (India) Ltd.
This is red flag for the Mac Charles (India) Ltd and it is real test of prompter’s integrity, since promoters of fraud Indian companies use similar type of to trick siphon -off money from balance sheet. Trick used by fraud Indian promoters is to announce a joint venture (JV) for a new project. After a while, there are reports about differences between the JV partners. The money invested in the JV is never recovered the promoter has already taken back the money in cash and written off the investment in its books. The JV is floated precisely to siphon off money by taking away money invested in the JV.
We don’t need to worry too much about it since Mac Charles (India) Ltd has already received around 10 cr and giving advance is common phenomena in the industry (Indian hotel Ltd. has given more than 700 cr Loans & Advances). Additionally, promoter has stake around 75% . Most of this type of fraud happens , when promoter holding is low . I have confidence on promoter. I only expect from promoter give regular update on this front .They have legal right/agreement to recover remaining amount. If company write off this money, then I will not hesitate to out of this counter. I had not found any major write off in annual reports of last few years .We need to keep eye on this event same time we should not prematurely consider promoter of Mac Charles (India) Ltd guilty of wrong doing only because of other fraud Indian companies did similar trick. I am just providing 360 degree view on this company, which is generally missed in broker’s research reports.
            If promoter passed this test and Mac Charles (India) Ltd receives remaining amount, then we are getting decent promoter, very good business, and very good dividend yielding company at mouth watering price or almost free of cost.
            B.
Mac Charles (India) Ltd has granted an unsecured loan of Rs. 2.3 cr to its wholly owned subsidiary without proper agreement. Even though, it is wholly owned subsidiary proper agreement is always prescribed.

Fair Price Theory:-
            Let us assume you are owner of this company Mac Charles (India) Ltd and somebody comes to you and wants to buy this whole company for just 162 cr . Will you sell at that price? What will be your response? I believe you will say, see boss I have investment of 91 cr , NCA of 43.50 cr . So, effectively you want to get my company Mac Charles (India) Ltd for only 30 cr .  We have total land at cost of 33 cr , which we have acquired in last 30 years, current value should be many folds . You know from last 8-10 years how much land prices appreciated.  Our Hotel Le Meridien of banglore is spread across 3 acres (1,30,680 sq ft) in prime areas . You can get current value of only land of Hotel Le Meridian by multiplying current rate to 1,30,680 if you know current rate in Bangalore (Indian silicon valley) . Do you have idea of Banglore and hotel industry? Ask who has idea about Banglore and hotel industry, then you can value our Hotel Le Meridian .
            We don’t have to pay electricity bills, since we have our own Wind Turbine Generators with capacity of 5.10 MW. It will give us revenue of 5cr / year with nominal operating cost and tax ( 5 year tax holiday in karnataka) will boost bottom line. Even in conservative estimate for setting up Wind Turbine Generators of 5.10 MW will cost you more than 30 Crores . Have you seen my cash flow from operating activities of Mac Charles (India) Ltd? Our cash flow is  64.33 , 23.92  ,31.94 and 37.07  crores  for Last four years.


Note :- This stock (Mac Charles (India) Ltd) has market lot of 50 instead of normal 1 . It means we can buy stock in bunch of 50 , 100 , 150 ............


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I am not an Investment advisor and do not provide this service via this Blog. The Blog is a personal diary and the stocks discussed on the blog represent my personal views and analysis. They are not recommendations to buy or sell stocks. I do not intend to recommend any stocks for financial or non-financial gains and may or may not be holding the stocks discussed on my blog.

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