The Dhandho Investor - Mohnish Pabrai

[NewMoney]

Joshuat,

Congratulations! Its good to make money!

I bought MRGE as my 2nd stock ever bought. It was a distressed stock and I lost just under $2K on it. I don't want that to happen again. Reading Charlie Munger's book, his method of investing is to do everything possible to make sure you're not gambling with your money and that the stock will be a home run. How do you know DFC would go up rather than down if the company does not have a history of making money and being profitable?

[petekoch]

Financial companies are different. It's all about spreads. And DFC is conservatively capitalized.

Here's an opinion:
Value Investors Club

Like Joshua, I'm looking at the distressed stuff, which is pretty much the housing and mortgage-related companies, the banks and a few retailers. These are the companies on sale right now. Pabrai has been in for about a year and a half and keeps upping his position. What I'd like to know is if it's a good long-term deal for me @$5, but I find financial companies tough to decipher. The only thing I have come up with is Pabrai's endorsement.

[NewMoney]

Pete,

I agree about the housing and mortgage related business. Stocks like Home Depot (HD) will rise dramatically once the housing market starts to turn around. My thought is though, why buy now and sit on a stock going nowhere? I think a guy could get the same price as today, or an even better price, 6 months to a year from now considering the housing market won't turn around in under a year. My thought was to wait and watch and invest a little closer to when things will turn around.

Warren Buffett bought a lot of USG last year. It must have looked good before the housing bust. So I'm assuming that would be a stock to watch which should turn around down the road, too.

[npg]

Originally Posted by petekoch

[snip] year and a half and keeps upping his position. What I'd like to know is if it's a good long-term deal for me @$5, but I find financial companies tough to decipher. The only thing I have come up with is Pabrai's endorsement.

Likewise, I don't really feel that I have the knowledge to decipher a banks accounts. Pabrai's endorsement is not enough to make it a purchase per se.

I am ok for taking a stake distressed business where one can figure out how bad things are and is able to work out scenarios and their probabilities of success (see USG) --- but with banking I am clueless.

And I am not alone. Looks like there are a lot of clueless people in the banking sector, having had no more of an idea than I had.

Unless one digs that sector (like Buffett etc Co.) I'd stay away for the time being. This is just too hairy for me. There are plenty of other fish in the pond.

[petekoch]

Originally Posted by npg

Likewise, I don't really feel that I have the knowledge to decipher a banks accounts. Pabrai's endorsement is not enough to make it a purchase per se.

I am ok for taking a stake distressed business where one can figure out how bad things are and is able to work out scenarios and their probabilities of success (see USG) --- but with banking I am clueless.

And I am not alone. Looks like there are a lot of clueless people in the banking sector, having had no more of an idea than I had.

Unless one digs that sector (like Buffett etc Co.) I'd stay away for the time being. This is just too hairy for me. There are plenty of other fish in the pond.

If/when I do purchase some bank shares, it will probably be one of Buffett's banks (BAC, WFC, USB) or possibly SNV. I don't believe in technical analysis, at least as a predictive tool. My last concession to T/A, in fact my only one, is the Coppock Curve; its buy signals are uncanny and have never failed me. I'll wait until the Coppock for the Amex Bank Index (^BKX) goes on a buy. I should plug in the XHB (homebuilders SPDR) also.

Oops. Just plugged the numbers for XHB into my super-proprietary Coppock spreadsheet which runs, not on Excel, but on a secret pseudo-spreadsheet program I picked up from the villagers in Piscataway, NJ, I think it was. Anyway, XHB is less than 2 years old, so it won't work. Insufficient data. I need an XHB substitute.

[npg]

Originally Posted by petekoch

If/when I do purchase some bank shares, it will probably be one of Buffett's banks (BAC, WFC, USB) or possibly SNV. I don't believe in technical analysis, at least as a predictive tool. My last concession to T/A, in fact my only one, is the Coppock Curve; its buy signals are uncanny and have never failed me. I'll wait until the Coppock for the Amex Bank Index (^BKX) goes on a buy. I should plug in the XHB (homebuilders SPDR) also.

I've waved bye bye to technical indicators and never looked back. Here is a bank I am currently investigating, FHN.

[petekoch]

Originally Posted by npg

I've waved bye bye to technical indicators and never looked back. Here is a bank I am currently investigating, FHN.

Damn, that's beaten up. At a 7-year low, with a very inviting yield (although barely covered by current earnings). This is one company where a share buy-back program makes sense. I've run across this one before.

[npg]

Yeh. It's looking like a little feast indeed.

I like the people factor in that bank. Rather than spending money on acquisitions they prefer growing from within. It's a very old-fashioned, hard-nosed business practice. It does strike a chord!

Doesn't look like too much of a rush to get into this one either. The biggie might probably come begin 2008 when even more mortgages are going to reset from their teaser rates. Guess everyone is currently sitting on their cash waiting to see how that one will play out (read: what bargains it will create).

But it looks promising eh? It's worth investigating. Haven't had enough time to go through a meaningful number of 10-K's to make a decision. If the price/book value ratio would be lower I would be less hesitant.

[petekoch]

Originally Posted by petekoch

Damn, that's beaten up. At a 7-year low, with a very inviting yield (although barely covered by current earnings). This is one company where a share buy-back program makes sense. I've run across this one before.

This is one good bank. In fact, the dominant bank in TENN, and it was all done through organic growth.

Morningstar calls FHN a great bank with a lousy mortgage business. Projected earnings not expected to cover dividend, but dividend still appears safe for now.

This looks like an excellent turnaround play for investors with 2-5 year horizons.

BTW, margins on sales of mortgages fell from 1.04% in 2004 to 0.76% in 2ndQ 2007. Doesn't sound like much, but that's about a 40% hair cut in profits. Says a lot about the mortgage and banking biz, doesn't it?

[NewMoney]

I'm new to T/A and so far it told me when to get in and when to get out. :)

I won't buy a stock because the trend says to buy it. I'm trying to value the stock and figure out where it fits into the economy and what kind of future potential it has. Then I used the T/A to tell me when to get in. I don't think the T/A will be right 100% of the time. But the problem is, it doesn't matter how great a stock is, if the big guys are starting to bail I can only assume they may know something I don't. I can't call and talk to the company (I tried) like they can. Even if they don't know something, they can still drive the price down. If the stock falls out of favor, I'm hoping to not ride it down. I'd rather get out and wait until it looks ready to uptrend again. If I get out to soon, the worst I can do is give up some profit. Sitting on cash in the bank is never a bad place to be. :)

How do you guys decide when to sell?