Guru in Focus: What is Mohnish Pabrai Buying?

Warren Buffett is known for keeping the investment process simple.  He avoids complex models, and once joked that if calculus were required, he’d have to give up the money business and go back to his childhood job of delivering papers.

But not even Warren Buffett can match Mohnish Pabrai when it comes to having a Spartan investment philosophy.  Pabrai has effectively boiled the entire process down to the logic of a coin flip: “Heads, I win.  Tails, I don’t lose too much.”

I love it.  Short, simple, and yet profound.


For anyone not familiar with Pabrai, he is the principal of Pabrai Funds and the author of The Dhando Investor, a book on value investing I strongly recommend.

Pabrai is a Warren Buffett disciple who takes Buffett’s comments on diversification seriously:  “Diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing.”

According to his latest SEC filings, Pabrai has just six stocks in his $340 million portfolio—and half of its value in just two stocks: Citigroup ($C) and Bank of America ($BAC).

So what is Mr. Pabrai buying these days?

Zinc…and a lot of it.

Throughout the month of June, Pabrai made several large additions to his holdings in Horsehead Holding Corporation ($ZINC), a producer and seller of zinc- and nickel-based products and the leading supplier of zinc in North America.

This is not a sexy business…as there is nothing particularly interesting or exciting about a company that mines zinc or produces zinc power…and it’s not even a particularly profitable one.  In fact, ZINC posted a loss in its last full year of reporting.

It’s not exceptionally cheap for a commodity producer either.  Horsehead sells for 13 times forward earnings and at 1.5 times book.  To put that in perspective, Teck Resources ($TCK), a diversified miner, trades for 8 times forward earnings and 0.63 times book.

I’m having a hard time seeing Pabrai’s angle here.  He has a long track record of buying distressed companies and what he calls “low-risk, high-uncertainty businesses.”   Horsehead could certainly fall into this latter camp, as commodities businesses are anything if not uncertain.

But this essentially looks like a large bullish call on the price of zinc.  It appears that Pabrai is making a large bet that zinc—which has drifted lower for most of the past three years—is about to get a lot more valuable.

He might have another angle, and I expect that he does.  It would be unlike Pabrai to wager a decent chunk of his investors’ capital on the price of a traded commodity.  But because I can’t figure out what that angle is, I’m not going to follow suit.

But might any of Pabrai’s other holdings have potential?

I’m somewhat bullish on Chesapeake Energy ($CHK), as I am bullish about the long-term prospects for natural gas and I see this as a “scandal stock” with most of the bad news long ago priced in.  I also like Pabrai’s bet on General Motors ($GM) via long-term warrants

Otherwise, Pabrai is essentially just long financials in a big way.  Buying Citi or Bank of America at substantially below book value should be a fairly low-risk investment.  Bank stocks will continue to get knocked around with every Fed announcement, but if you are content to “buy and forget” for a few years, it’s hard to see losing a lot of money on that trade.  And the upside could easily be 100% or more over the course of the next 2-3 years.

Or, as Pabrai likes to say, this is a case of heads, you win.  Tails, you’re not likely to lose too much.

GURU vs ALFA: Comparing the Two Guru ETFs

June has been a rough month for a lot of investors.  The investing themes that have done well so far in 2013—everything from U.S. dividend-focused stocks to Japanese small caps—have gone sharply into reverse.   The market has started to get jitters that the Fed’s QE Infinity will actually be quite finite…and it appears that Abenomics has run out of steam.

We’re not in bear market territory, and we’re not really in a broad-based correction.   But investors seem to be struggling to find that next great investment theme.

During times like these, it’s nice to look over the shoulders of some of the best and brightest managers in the business to see how they are reacting.  I make a habit out of digging through the trading moves of managers I admire, and sites like Guru Focus take what used to be a tedious and time-consuming nightmare—digging through SEC filings—and turn it into a simple screen.

Want to see what Warren Buffett is buying?  It’s as simple as viewing his profile.

Investors looking for a one-stop “buy and forget” guru following strategy now have a couple ETFs to choose from. One—the Global X Top Guru Holdings Index ETF ($GURU)I reviewed about a year ago.

As I noted in my review, GURU’s portfolio is an equally-weighted mix of the “high conviction” picks of the hedge fund managers that Global X follows.  These would include household names like David Einhorn’s Greenlight Capital, John Paulson’s Paulson & Company, and Seth Klarman’s Baupost Capital, among many, many others.

AlphaClone has a competing guru product, the AlphaClone Alternative Alpha ETF ($ALFA).

AlphaClone’s methodology is a little more complex.  The underlying index looks at most of the same managers but has a proprietary system for ranking them.  And while the positions are “equally weighted,” there is an allowance for overweighting if a stock has multiple guru owners.  For example, a stock held by twice the number of managers would have twice the weighting in the index.

And AlphaClone’s ETF has one other noteworthy feature: it has a “dynamic hedging” mechanism that allows it to be up to 50% short during a prolonged market downturn.  In ALFA’s case, the ETF will shift half of the portfolio into an inverse S&P 500 fund when the S&P 500 ends a month below its 200-day moving average.

So, which ETF is better?

It’s really a matter of opinion.  ALFA’s built in hedging strategy would have been a life saver during the 2000-2003 bear market or the 2008 meltdown.  But during a long range-bound market, there is the risk of getting perpetually whipsawed by buying and selling at precisely the wrong turning points.  I prefer to hedge my portfolio in other ways—such as by altering the allocation between equities and cash or bonds or by taking an active rebalancing approach.  But is it really just a matter of preference and investing style.

ALFA’s ability to overweight positions based on ownership by multiple gurus is a nice feature, however, and I consider this an advantage over GURU’s simple equal weighting.

GURU_ALFA

Taking a look at YTD performance, however, GURU has the better record.   ALFA has tracked the S&P 500 pretty closely this year, whereas GURU is outperforming by a good 5%.

A single five-month period is not sufficient for judging the performance of a model, and over time I would expect both to outperform the S&P 500, at least before taxes and fees.

But you should also have realistic expectations about what you are buying.  Buying GURU and ALFA is not the same as buying an interest in the underlying hedge funds.  As I noted in my original article on GURU, the ETFs only buy listed stocks, and many major guru investments are not publicly traded.  Many of Warren Buffett’s holdings are privately-held companies, for example.

Furthermore, the ETF only tracks long positions.  If a given “high conviction” pick is really just one half of a pair trade, the ETF managers would have no way of knowing this.  And there is no way to account for futures, options or other derivatives that might be part of the trade.

And finally, as with all guru-following strategies, there is a time lag.  It is entirely possible that the conditions that lead a guru to buy a stock no longer exist by the time that GURU and ALFA place their trades.

My take?  GURU and ALFA are both decent ETF products, and I expect both to do well.  But if you really want to take full advantage of guru-following strategies, roll up your sleeves and look at your favorite investors one by one.  You can learn more from looking at the manager’s portfolio as a whole than by simply selecting the top pick and blindly following it.

Sizemore Capital has no position in GURU or ALFA. This article first appeared on InvestorPlace.

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And the Masters of the Universe Say…

In my last article, I noted that “Big Money” managers was wildly bullish on U.S. stocks—74% were bullish and only 7% were bearish.

But what about those legendary masters of the universe—the global macro hedge fund managers who, if their reputations are to be believed, hold the fates of companies and even entire countries in the palms of their hands?

At last week’s Ira Sohn Investment Conference, we got to hear the latest investment themes from some of the biggest names in the business, including Bill Ackman, Jim Chanos, Stanley Druckenmiller, and David Einhorn, among others.

Some of these “smart money” guys haven’t been looking too smart of late.  Ackman has taken enormous losses in JC Penney (NYSE:JCP); at one point, his losses on the investment were over $500 million.  He also appears to be on the wrong side of a very large short position in Herbalife (NYSE:HLF).

This year Ackman is recommending Procter & Gamble (NYSE:PG), even though it is sitting near 52-week highs and is trading at a substantial premium to the broader market…after a long run in which consumer staples have outperformed.  Ackman is agitating for management change.  We’ll see how Ackman’s recommendation plays out, but I wouldn’t expect market-beating returns here.

Most of the speakers focused their comments on individual stocks, but there were some “big picture” themes worth noting as well.  Kyle Bass of Hayman Capital reiterated his bearish call on Japan, saying that “the beginning of the end has begun.”  I agree with Bass’ view on Japan and recently called it “the short opportunity of a lifetime” here on the Trading Deck.  I can’t say I agree with Bass in his bullish defense of gold, however.

Stanley Druckenmiller, a legendary investor and a former top trader under George Soros, had perhaps the most interesting macro perspective.  Druckenmiller argued that the commodity supercycle—the massive decade-long bull market enjoyed by most commodities—is over.  The primary culprit?  A slowdown in commodity demand from China.

I would take Druckenmiller seriously here.  This is a man who enjoyed a 30-year run without losing money and who is one of the best managers alive today.  Druckenmiller sees the slowdown in China—coming at a time when commodity production is being ramped up globally—resulting in a supply glut and sharply lower prices.  This is good news for companies with large raw materials costs and for countries that import large volumes of commodities, but it is very bad news for Brazil, South Africa and Australia, among other resource-rich countries.

Still, you might want to take the words of all of these masters of the universe with a grain of salt the size of their egos.  88% of hedge fund managers underperformed the S&P 500 last year.

Disclosures: Sizemore Capital has no positions in any security mentioned.   This article first appeared on MarketWatch.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

GURU: Investing With the Best Minds in the Business

Last week, I took a look at how the “Investing All-Stars” were positioning themselves for the remainder of 2012.

Then—as now—the Eurozone crisis hung over the capital markets like the proverbial Sword of Damocles.  Given the difficulty of investing under this kind of uncertainty, I thought it would be beneficial to peek over the shoulders of some of the brightest minds in the business.   If anyone could navigate the storm, it would presumably be them.

Lucky for us, there are quite a few good shoulders over which we can peek.  All large institutional investors are required to disclose their security holdings to the SEC by reporting via Form 13-F, and this information is made publicly available.  You can dig through the filings yourself if you enjoy reading financial legalese, but you certainly don’t need to. There is an entire niche industry dedicated to “13-F mining,” and several very good online services that do this legwork for you.  A site I’ve used over the years to check up on some of my favorite investors is GuruFocus, and several new entrants are worth noting as well, including InsiderEdge and  AlphaClone.

For anyone looking for an investment theme to follow, using one of these sites is a great place to start.

For those investors not particularly interested in doing their own research, Global X Funds has created a passive ETF that tracks the trades of major hedge fund managers: the Top Guru Holdings Index ETF ($GURU).

GURU’s portfolio is an equally-weighted mix of the “high conviction” picks of the hedge fund managers that Global X follows.  These would include household names like David Einhorn’s Greenlight Capital, John Paulson’s Paulson & Company, and Seth Klarman’s Baupost Capital, among many, many others.

It’s not hard to understand the appeal of the GURU ETF.  You’re getting some of the top investment ideas of the world’s most talented hedge fund gurus but without the high fees that come with investing in the hedge funds themselves.  Rather than pay the standard 2% of assets and 20% of profits, investors pay a modest 0.75% in expenses.   Not bad.

There are a few shortcomings to note, however:

  1. The ETF only buys listed stocks, and many major guru investments are not publicly traded.  Consider Warren Buffett’s Berkshire Hathaway (which is currently not tracked by GURU).  Many of Berkshire’s major positions are in private companies.
  2. GURU’s positions are equally-weighted.  Higher-conviction stocks within the portfolio are given no greater weight, nor are the risk management aspects of position sizing considered.
  3. The ETF only tracks long positions.  If a given “high conviction” pick is really just one half of a pair trade, the ETF managers would have no way of knowing this.
  4. As with all guru-following strategies, there is a time lag.  It is entirely possible that the conditions that lead a guru to buy a stock no longer exist by the time that the GURU ETF picks it up.
  5. As a new ETF, GURU has very little in assets under management and very thin trading volume.  You have to be careful getting in or out of a position in GURU.

For investors building a long-term “buy and forgot” portfolio, GURU is an ETF I would consider, along with the Vanguard Dividend Appreciation ETF ($VIG) and the PowerShares International Dividend Achievers ETF ($PID) (to see my rationale for VIG and PID, see “Sizemore Capital Allocation Change: Dividend Appreciation” and “European Dividend Stocks”) .

But while the ETF has its merits and a long-term holding, I see more value in using it as a fishing pond for investment ideas.  Rather than buy the portfolio as is it, with all of the faults I described above, why not instead cherry pick the best ideas from the ETF?

With that said, let’s take a look at what GURU holds: GURU fund holdings.

There are some familiar names, such as Microsoft ($MSFT) and Apple ($AAPL).  There are also a few names that, for all the enthusiasm of the gurus who own them, haven’t quite panned out.  Tempur-Pedic International ($TPX) is a glaring example; the former Wall Street darling is down by 50% in the past month alone.

Carlos Slim’s America Movil ($AMX) also made the list, which I find particularly interesting.  It would appear that the gurus are investing in the chief competitor of my favorite Latin American telecom play Telefonica ($TEF).

Next quarter, when the ETF is rebalanced, GURU’s holdings will no doubt be substantially different than they are today.  So, if you are following my suggestion to use GURU as a fishing pond, make sure that you review your holdings on at least a quarterly basis.

I’m betting that Tempur-Pedic doesn’t make the cut.

Disclosures: Charles Sizemore contributes articles to GuruFocus and InsiderEdge on occasion.  MSFT, PID, TEF and VIG are currently held by Sizemore Capital clients. This article first appeared on MarketWatch.

What Says the Investing All-Star Team?

I’ll let you in on a little secret, dear reader. In those moments when I have doubts, I like to look over the shoulders of great investors to see what they are doing. (Actually, it’s really not much of a secret. It’s a topic I discuss quite openly and frequently. See “When in Doubt, Follow the Greats.”)

Back in grammar school, your teacher might have called it “cheating,” but this isn’t grammar school. It’s the rough-and-tumble real world of investing, and we can all learn a lot from following the trades of great investors.

Every year in January, Barron’s assembles an “all-star team” of sorts to participate in their Roundtable discussion. The 2012 team includes familiar names such as Pimco founder Bill Gross, Gloom, Boom & Doom Report Editor Marc Faber, and Senior Investment Strategist of Goldman Sachs Abby Joseph Cohen.

In the June 9 issue of the magazine, Barron’s checked up on the Roundtable to get their investment outlook in light of the turbulence coming out of Europe (see “Caution: Sharp Turns Ahead.”)

Views among the ten panelists run the gamut, but a couple themes showed up with consistency.

  1. Europe’s sovereign debt crisis continues to be the single biggest threat to both the global economy and the capital markets.
  2. China’s slowdown is also a major concern.
  3. The United States—while healthy by comparison—faces the “fiscal cliff” of tax hikes and spending cuts next year barring a deal between the White House and Congress.

The panelists might as well have added that the sky is blue, as these conclusions will come as a surprise to no one. Still, their recommendations for how to navigate the storm are varied and insightful.

Felix Zulauf, President of Zulauf Asset Management, is the most bearish of the bunch. Zulauf notes that stocks are cheap—adjusted for inflation, Italian stocks trade at “levels last seen in Mussolini’s era”—yet that does not guarantee good returns going forward. Zulauf sees the West more or less caving in on itself under the weights of its debts.

Abby Joseph Cohen notes that “Individual investors have had the stuffing knocked out of them” in recent years, which explains their skittishness. No one wants to sit through another 2008 meltdown, so investors tend to sell first and ask questions later.

This has created bargains, however. Like Zulauf, Cohen considers stocks to be cheap by historical standards: “Stocks are selling at low price/earnings ratios [and] companies have strong balance sheets.”

Of course, as Cohen notes, this means nothing in the short-term. Stocks can go from cheap to cheaper.

Meryl Witmer, General Partner of Eagle Capital Partners, has the views closest to my own. Says Witmer, “The exodus from the market has created bargains. You have to stay unemotional and analytical and try to find companies that, in the long run, will generate free cash and increase in value. Usually, when stocks get cheap like this, things get better.”

Witmer takes a play out of Warren Buffett’s book, arguing that you should only buy a company “if the market were to close for 10 years, you would still be happy owning that company.”

I will note that when I have made the biggest mistakes in my investing career, it is usually because I failed to take that advice. You don’t have to actually hold the stock for ten years. You should just make sure that everything you own is something you’d be willing to hold for ten years if the market were to close tomorrow. It’s a sound rule of thumb.

Bill Gross’s comments were particularly interesting. For a man known around the world as the “Bond King,” Mr. Gross is not at all bullish on bonds, noting that “Treasuries are overvalued and getting more so.”

Gross sees roughly a decade ahead of slow growth with the economy on central bank monetary “life support.” Yet he is bullish on select emerging market bonds and, interestingly, Sizemore Investment Letter recommendation Siemens ($SI) and French pharmaceutical giant Sanofi ($SNY)—both European companies in the heart of the sovereign debt crisis.

I’ll wrap this up with comments from “Dr. Doom” Marc Faber.

Faber, uncharacteristically, is surprisingly light on the doom and gloom. Though he expects things to get worse before they get better, he believes that “stock markets are oversold” and that “the U.S. bond market is overbought.”

Not surprisingly, Faber likes gold. He’s a long-time gold bug. But rather than recommend investing in a bunker in Idaho, Faber also likes Singapore REITS at current prices, as well as select European blue chips—including Sizemore Investment Letter recommendation Nestle ($NSRGY).

So there you have it. The All Star team is cautious, but they’re not exactly running for the hills either. By and large, they are recommending selective buying on dips, particularly of high-quality, dividend-focused equities.

Sound advice, I would say.

Disclosures: SI and NSRGY are Sizemore Capital holdings.  This article first appeared on MarketWatch.