Customer Reviews

Mosaic: Perspectives on Investing

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This book was given to me by a friend who saw Mohnish Pabrai speak at a value investor's conference. Pabrai has hundreds of millions under management, yet works with only a single secretary / assistant, reads a lot, and takes naps a lot, resting in the conviction of his concentrated, long-term positions.

In this Pabrai is a living counterpoint to one of his favorite Pascal quotes, "All man's miseries derive from not being able to sit in a quiet room alone." That is the type of observation that either resonates deeply or not at all. For me it definitely does.

I think Pabrai has much to offer by way of example, and I appreciate the nuggets of wisdom in this slim tome. However, I was disappointed by a few glaring instances of sloppy thinking here and there. For someone who vigorously highlights a commitment to latticework and the use of multidisciplinary thinking, some of the assertions in Mosaic were a bit breezy, with one or two real howlers thrown in. I do not highlight them because they indelibly mar the book, but because they were so surprising in an otherwise thoughtful text.

For example: in an essay on the folly of shorting, Pabrai does not just make known his distaste for shorting, he argues that shorting stocks makes no sense under any circumstance whatsoever. This is an extreme view that is defeated by simple evidence--that evidence being the number of successful funds who have made their shorting activity a consistent profit center, with track records to prove it. Not only have numerous long / short managers navigated the short side successfully, a bonus for profit-oriented shorts is a volatility damping effect on the portfolio, as short positions help offset hurting longs in market declines.

There is a strong empirical disconnect here; if shorting is a bad idea and doesn't work, then why has it worked well for a statistically significant number of practitioners over a statistically meaningful period of time? And how is it useful to say stocks return 8-10% a year "on average" without acknowledging the fact that future returns hinge greatly on present valuations, that industries or even whole sectors can go into multi-year decline as the rest of the market rises, and that stocks have seen flat to negative returns in the past, inflation adjusted, for years or even decades at a time?

On a more puzzling note, an example Pabrai gives to show why shorting is dangerous makes little sense. He starts with a hypothetical overvalued company at $1 billion market cap and 100 million shares outstanding, then goes on to show how the shorts could get "hosed" (his term) if the company chose to do a secondary offering of 500 million additional shares, adding the offering cash to its books to raise intrinsic value.

The reason this example is ludicrous is because it blithely assumes the successful absorption of a huge offering at the going market price, even as the total number of shares balloons by five hundred percent! If a company out there really tried to flood the market with five additional shares for each one currently outstanding--without compelling reason to do so--it would be an absolute field day for the shorts, as new supply would overwhelm existing market demand. (Not to mention the obvious question, if small overvalued companies could raise their intrinsic values simply by slinging new shares for quick cash, why don't they do it more often? Because unjustified secondaries don't fly, that's why.) This example showed a glaring lack of regard for simple supply and demand mechanics, and some other elements of the "don't short" argument were hastily put together and borderline superstitious.

I also had a bone to pick with the assertion that entrepreneurs are not risk takers. It's possible that they are arbitrageurs and risk takers simultaneously... but to suggest that entrepreneurs are not risk takers at all is over the top. Pabrai says that Bill Gates "faced uncertainty and ambiguity, but not risk," because Gates had the comfort of knowing he could go back to Harvard if Microsoft failed. Speaking later of a fictional hairdresser with plans to start a new hair salon, Pabrai says she has "virtually no risk" because "if the venture fails, she can simply go back to working at another salon."

No risk? Not quite. Starting an enterprise with your own credit on the line, and making it run on blood, sweat, and tears, is typically a high-risk proposition no matter what one's fallback options are. There is a massive time and energy cost to factor in, not to mention financial cost, emotional cost, and family cost. Yes, Bill Gates had Harvard as a fallback. But what if Microsoft had fizzled out after four grueling years of 90 hour weeks? Four years of life thrown away, and possible bankruptcy to boot, is somehow no big deal?

The example of the riskless hair salon is even more detached from reality; Gates at least had an idea what he was getting into. Pabrai should read "The E Myth" by Michael Gerber: small mom and pop type businesses are notorious for tearing would be entrepreneurs apart, because the myriad challenges of running a small business are so often underestimated. Even if the fictional hairdresser can go back to another salon, she might do so with destroyed finances, destroyed relationships, and an ulcer on top. The risk of sailing out into the open seas is real.

Moving on, this paragraph bowled me over, especially since it came in reference to a 'circle of competence' test: "Most readers use Intel and Microsoft products directly on a daily basis. Most of us use Cisco's products indirectly each time we go on the Internet or a network within the workplace. It's fair to say that most readers understand these three businesses quite well."

Quite well? How many people know the first thing about the logistics of the semiconductor business, just because there is an Intel chip hidden in their PC? How many understand the even more complex guts of the router / internet backbone business (I'm not even sure what the proper terminology is) just because they use Cisco's products inadvertently to surf the web? Understanding the deeper dynamics of a company like Intel, let alone Cisco, is far outside the circle of competence for most non-tech savvy investors, regardless of the ubiquity of INTC and CSCO products--which is a great example of why Warren Buffett, Pabrai's hero, doesn't mess with technology!

The missteps are all the more head-scratching considering that Pabrai runs a hedge fund, so he should know about share price mechanics; he founded a successful company, so he should know about the risk-laden aspects of entrepreneurialism; and he worked in the tech industry for years, so he should know the average joe has little knowledge of what goes on under the hood.

Let me close by saying I really did like this book, and Pabrai's personal success as a man doing what he loves (not to mention the excellent success of the Pabrai Funds) is both motivating and inspiring. The book gave me a sense of looking at the world through a traditional value investor's eyes, not to mention an interesting idea or two, and that made it a more than worthwhile read. My stringent criticism comes in part because I too am a mental model / latticework junkie, as Pabrai is, and I feel that us multidisciplinary guys should appreciate being held to the highest standards. Iron sharpening iron and such.

This book is a good read for every value investor. Pabrai has done an excellent job of distilling the Warren Buffett method of investing down to a few key points. These points are made in a series of articles he authored for various newsletters and web sites between 2001 and 2003 (the book reprints these articles in reverse chronological order).

The great thing about Pabrai is that, using methods learned from studying Warren Buffett, he has started his own fund that has been highly successful over a number of years. The fact he has been able to implement what he discusses gives him special credibility, IMHO, and it certainly differentiates him from many other authors who have studied Buffett.

The book itself is deceivingly short, consisting of only 138 pages, each discussing a specific point of interest to the author. Some of the more interesting points I found were why not to invest in retailers, "Pabrai's law of large numbers," discussions of how to identify good management, and a review of how to compute the intrinsic value of a company. This latter point would probably be of interest to many investors, since Wall Street analysts typically use extremely complicated formulas involving anticipated sales, costs, etc. Pabrai's method, which presumably reflect Buffett's as well, is to come up with a reasonable adjusted free cash flow, project forward for 10 years, discounted at the risk free rate, and apply a terminal value. Simple and, in its own way, elegent.

I am surprised that more people have not read or commented on the author's work, particularly since he's coming out with a new book, Dhandho Investing, in April 2007. While I wish the book was longer and more detailed, I also appreciate Pabrai's point that investing does not need to be complicated. A longer book would have likely detracted from that message.

In many respects, this short, simple book is one of the better books on investing that I have read.

This is an exceptional little book. The author, Mohnish Pabrai, an Entreprenuer turned Value Investor, provides deep insights and simple truths to valuing businesses. He has the clear knack and ability to see a business well into the future (ex: HP/Compaq merger) and can relate it to his personal experience. His lucid analysis always proves that 'basic truths' of success and failures of a company are always the simplest.

I discovered Pabrai in the pages of Forbes, which reported that he bought Frontline at $ 3.00, and now FRO is around $ 40.00. The book is very deep in common sense and I discovered some interesting books mentioned inside that will help me to improve my "mental models" for analysing future investments. Pabrai dislikes to shorting stocks, I disagree, because sometimes it is possible to do a short with little risk. My approach is what I call "an event-driven short", and so far I don't have any trouble with it. Templeton applyed a similar approach when he shorted a basket of tech stocks in 2000, but all of them had a common feature: the lock up period for the insiders to sell their shares will finish in a few days. The book shows that Buffett et alli teachings could be mastered if we have discipline, patience and commitment. Pabrai offers a model for individual investors that want manage their own investments using a "safe and cheap" approach.

The book has some good points, but it was way too expensive. The Price means it is not worth it, save your cash and buy four books for the price of one. The book has also not aged well.

Mosaic is a compendium of essays written by Mohnish Pabrai from 2001-2004. The essays were originally published by TheStreet.com, The Motley Fool and Silicon India Magazine. A former technology entrepreneur, Pabrai is Managing Partner of Pabrai Investment Funds. Pabrai is a self-avowed student of the Ben Graham-Warren Buffett-Charlie Munger school of investing. That is to say, he is a value investor, searching for opportunities to buy pieces of companies selling substantially below their intrinsic value. Needless to say, this is a very accessible book, written in a style and level that the average person can easily understand. The author does a great job explaining the basic tenets of value investing. Part of Pabrai's appeal is that he was an entrepreneur before he was an investor, which gives him an unparalleled perspective on what it means to run a company. For a while I've wondered whether study of entrepreneurship is a worthy subject of study for investors, a question further answered in the affirmative by the positive dust jacket blurb by Amar Bhide, author of The Origin and Evolution of New Businesses.


As one would expect, there are frequent references to and reprints of quotes by Warren Buffett, but I was especially pleased to see references to Buffett's better half at Berkshire Hathaway, Charlie Munger. In fact, there are two chapters devoted to Munger's approach of using a "latticework" of mental models in the investment decision process. This is distilled to its essence on page 61: "Investing is all about making a series of observations about a given business and developing a theory about what it's going to do in the future...Start by making a series of careful observations, analyze them, fixate on the ones that fly in the face of an emerging picture, ask lots of "Why" questions and look at the final latticework to make a decision." The reader can of course learn more about Munger's wonderfully unconventional ideas in Poor Charlie's Almanack: The Wit and Wisdom of Charles T. Munger, Expanded Third Edition.

One challenge with compiling a book of essays from other sources, even ones written in such a short period of time, is that the author's views and perspectives can change with the times. This makes the book feel a little uneven and confusing to the close observer. For example, on page 50 in a chapter entitled "Dhando!" (a Gujarati word meaning "business" and title of his follow up book, The Dhandho Investor: The Low - Risk Value Method to High Returns). Pabrai contends "Investing is not rocket science. It is pretty simple. It should be painfully clear how a business generates cash today, how much it is likely to continue to generate into the future and how much you're paying for that future cash flow. Think about the width and depth of the moat [i.e. competitive advantage]. Think about the knight in charge of the castle." Most of the chapters have a similar upbeat feel to them.

In a later chapter near the end of the book entitled "The Investor's Dilemma-Mutual Funds or Stocks?", Pabrai is much less sanguine about the likelihood of success in the stock market. On page 108 he cautions "there are only a few of us who have the discipline, analytics and patience to follow this approach...individual stock picking is a loser's game for most investors." The former chapter was originally written in August 2002; the latter was penned in September 2001, at a low point in the stock market. While the former essay was perhaps a little too optimistic, the latter is perhaps a little too pessimistic for a readership interested in learning about how to become a value investor. Nonetheless, Pabrai is being responsible in reminding the reader that successful investing is not automatic. Unless one is prepared to do the hard work to become well educated in the details of a small number of companies, use a disciplined approach to the investing decision, and be extremely patient for good opportunities to come your way, then in this reviewer's opinion passive investments in low-cost index funds are probably the best way to go.

Mohnish Pabrai at the time of this post currently manages about $260 million in his hedge funds using a value approach. His returns place him in the top 1% of money managers. If you ever get a chance to go to one of his annual meetings you'll realize what a truely exceptional investment manager he is. Like any investing book, do not expect to be able to read this book and make any money. Instead, this is a compilation of many short articles that he has written which form the basis for his investment approach. Do also realize that most of his actions and analysis that he employs are at a much higher intellectual level than the discussions in this book, which are mainly geared to the average individual. You may or may not agree with his strategy, but his record speaks for itself. If you don't agree that this is an exceptional book, then let's see you outperform his accomplishments and write your own book...