On Monday, I wrote the first in a series of columns on Warren Buffett's search for a new apprentice, starting off with Ken Shubin Stein of hedge fund Spencer Capital.
Today I'm going to posit that hedge fund manager Mohnish Pabrai, who runs Pabrai Investments, would also be an excellent choice as the next Warren Buffett. Pabrai has very focused holdings; you can check out
Mohnish started and sold a software company in the 1990s and then became enraptured with value investing. He started his fund in early 2000 and has been running it since then with 20%-plus returns per year.
I profiled and interviewed Mohnish for my book
Trade Like Warren Buffett
. Pabrai structured his hedge fund exactly like the original Buffett partnership of the 1950s and '60s. Basically, there is no management fee and a 6% hurdle before a 20% performance fee is collected.
Prior to starting his fund, Pabrai actually wrote to Buffett in early 1999 and asked for a job so that he could learn from the master, but he was turned down. After getting over his disappointment, he started his hedge fund.
Pabrai was interviewed in the April 5, 2006, issue of
, and in it he describes how he looks for "hated, distressed, thrown away businesses that are mispriced" with an average market cap of around $500 million. Not making big bets on large-cap stocks is one of the few places where Pabrai differs from Buffet. Pabrai goes on to say how he tries to minimize the volatility in his returns by investing in only one stock per industry and minimizing any correlations between his positions.
For instance, in my article on the
Dogs of the Magic Formula, I mentioned that Pabrai likes
. This is a classic case of a company with a great balance sheet, strong cash flows and a strong underlying business that has a cloud over it at the moment, but not a big enough cloud to really ruin the business.
Another company Pabrai has invested in is
. Pinnacle has been hit by the general malaise of the airline industry. The company is akin to an airline-for-hire in that it used to pad out the fleet for
and fly many of its routes. With Northwest in bankruptcy, Pinnacle won a settlement that eliminated restrictions on its ability to fly for other major carriers.
The market has remained focused on the fact that Pinnacle's major customers went bankrupt. However, I bet Pabrai is focusing on the fact that the company managed to stay in business and clean up its balance sheet and will now win new customers over the next year while maintaining a healthy profitability.
Another Pinnacle holder is
, which is also a hedge fund that likes distressed situations. While I've never seen Pabrai "go activist," Clinton Group regularly does. In December, for instance, it filed a 13D on
, stating that it owned 5.2% of Griffon's shares and that it was interested in working with management to evaluate strategic alternatives for the company.
A blogger who goes by the name Stock Market Beat also has Pinnacle on
. Pinnacle also appears on ValueBloggers'
on the Stockpickr site.
Pabrai spoke about Pinnacle at the recent Value Investing Congress, a collection of some of the best and brightest value investors in the country. We've collected all the stocks mentioned at the conference
Tomorrow I will offer the final part in my series on Buffett's apprentice, and I plan on going over the other three remaining candidates. In the meantime, check out
Stockpickr tip of the day
: We've relaunched our
section to include daily analysis of the latest 52-week low situations, the most recent insider buying, weekly activist situations, analyst upgrades and downgrades, top stock buybacks, upcoming splits and so on.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider Cryptologic and Pinnacle Airlines to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.
At the time of publication, Altucher and/or his fund had no positions in stocks mentioned, although positions may change at any time.
James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of
Trade Like a Hedge Fund
Trade Like Warren Buffett
. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback;
to send him an email.
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