Mohnish Pabrai: The Shameless Cloner and His Strategy
Mohnish Pabrai is one of the best investors in the world and a disciple of Warren Buffett and Charlie Munger. Known as the "shameless cloner," Pabrai has built his reputation by borrowing the best ideas from others. His strategy is simpler: he only makes big bets when the odds are in his favor, he looks for investment anomalies and embraces opportunities with high uncertainty but low risk. Today, we're discussing the strategies that made Mohnish Pabrai a successful investor.
The Shameless Cloner: Learning from the Best
Pabrai’s self-proclaimed title of “shameless cloner” comes from his belief in learning from the best and adopting successful strategies from legendary investors like Warren Buffett. He openly admits, "I don't have an original idea in my head. I've gotten everything from somebody else."
By studying what works in investing, Pabrai aims to adopt only the best ideas and avoid mistakes. His approach is to look at other investors’ portfolios as a first filter for potential ideas. He then performs an analysis of this list of stocks and selects his favorites. This cloning strategy has proven itself, and everybody can do it. If you want to apply this strategy, you can view the portfolios of gurus on websites like Dataroma and start from there.
Searching for Anomalies: Investment Opportunities with P/E Ratios of 1
Pabrai is an expert at identifying investment anomalies—opportunities where a stock is overlooked by the market because of temporary issues or misperceptions. For instance, during market crashes or periods of sector-specific distress, Pabrai looks for businesses that are trading at rock-bottom valuations despite having strong fundamentals. One of his unique strategies is to invest in companies with hidden Price-to-Earnings (P/E) ratios of 1. These opportunities are rare, but they can generate extraordinary returns when the market eventually recognizes the true value of the company.
Fiat Chrysler Automobiles
A prime example of an anomaly was Fiat Chrysler Automobiles (FCA). Pabrai initially added Fiat to his portfolio in 2012, gradually building a substantial position over subsequent years (⅓ of his portfolio). At the time, Fiat Chrysler was trading at less than $5 a share and the company had forecasted that by 2018 they would be making about $5 a share. So, this was a hidden P/E of 1 in a few years. He explained his reasoning:
"They have a parts business that is on track to produce $500 million in cash flow. That business is probably worth more than $5 billion, or something like 50% of their market cap. Fiat has an exceptional management that has taken steps, like spinning out Ferrari, to unlock value that wasn't visible to the market. They'll probably sell or spin off the parts business. If at some point they do something with Maserati or Jeep, the valuation goes above $20 to $30 a share."
As it turned out, this forecast was correct. Fiat effectively reached its objectives, unlocked hidden value with great capital allocation decisions. In 2018, the hidden P/E of 1 materialized, and the investment increased by 8x in that time.
IPSCO
Another example is his investment in IPSCO, a tubular steel producer he discovered in 2004. Despite trading at $45 per share with no debt and $15 in cash, the company had secured contracts guaranteeing an additional $15 annually for the next two years, totaling $45 in cash expected within two years.
Pabrai recognized the opportunity, seeing that he essentially paid upfront for two years of predictable earnings. The discount was caused by the complete uncertainty after these two years when earnings could sharply decline. Pabrai’s rationale was that if he held the stock for 2 years, he’d get all his money back. Then, at that point, he wanted to see what the stock would trade at. It had to trade for something because it had all these huge plants and infrastructure and everything else.
After a few months, IPSCO disclosed that an additional $15 in cash had been secured for a third year. The stock price climbed to $65 and later spiked close to $90. Ultimately, a Swedish firm recognized IPSCO's value and offered $160 per share, and Pabrai sold the stock. He ended up with a 4X return in 2 years.
Coal Stocks
In 2023, Mohnish Pabrai bought some metallurgical coal stocks, which now represent 25% of his current portfolio. This sector was overlooked and it created opportunities.
Companies like Alpha Metallurgical Resources (AMR) and Consol Energy ($CEIX (CONSOL Energy Inc)) have caught Pabrai's eye due to their exceptionally low Price-to-Earnings (P/E) ratios, “guaranteed cash flows” for 2024-25 and good capital allocation. These investments have already appreciated by over 80%, and Pabrai remains optimistic about their future potential.
$CEIX$AMR (Alpha Metallurgical Resources, Inc)$STLA.US (Stellantis NV)... Show More
