If you have been following F Wall Street for a while, you’ll remember that I went to the Pabrai Funds annual meeting last year. Mohnish Pabrai runs an Early Buffett partnership – no management fee, just a performance fee of 25% of annual profits above 6%. While he’s been getting some heat from various value investors and fans/former fans around the web, Pabrai’s record of outperformance is still amazing.

Well, it’s that time of year again…

PABRAI’S PERFORMANCE RECORD

A July 1, 1999 investment of $100,000 in Pabrai Investment Fund I would have been worth $532,500 as of June 30, 2008 – a 20.4% annualized return. During that time, the Dow gained just 2.5% on average, including reinvested dividends. So, Pabrai’s outperformance relative to the index is 17.9% a year – not too shabby for a tech-geek-turned-guru (no offense, Mohnish ☺).

His other two funds have fared well – PIFI 3 beat the Dow by 7.1% on average since February of 2002, and PIFI 4 eeked out a 0.3% outperformance on average since 2003. As one might expect, as his assets grew, his returns began to shrink. Mohnish believes that he can effectively employ up to $1 billion in assets, at which point he’ll stop accepting new money.

SIZE MATTERS (Regardless of What You May Have Heard)

It is a lot easier to invest $100,000 or $1 million than $1 billion (or $10 billion, etc). In general, you will find a lot more – and a lot bigger – inefficiencies in small opportunities than in large ones. The institutions will ignore the $100 million buyout, or the $200 million Graham-style net-net which might fit into a piece of a smaller portfolio. Why? I think it is for two main reasons:

1. They can’t put enough money into these deals to make it “worth it” from an impact-to-portfolio standpoint; and/or,
2. They need to be “right” every month or quarter or they risk losing investors. And in their mind, and in the minds of their investors (and the overwhelming majority of investors), being “right” means (a) break-even or up every day, month, quarter, and/or year and (b) owning the stocks in the news.

I have to admit – if I couldn’t see the holdings inside of a portfolio or if I didn’t understand the strategy, I’d freak out if my manager told me to remain calm as my portfolio was slashed in half, or if my serious money was in some $80 million market cap company I didn’t understand, and that swung 6% a day for no apparent reason.

I once posted (in a comment, I think) that I have a friend that has consistently earned triple-digit returns in futures over the past few years. I’d love to earn those kind of returns. But I don’t think I could handle the volatility because I don’t understand the system/approach/whatever.

(That’s why so many people belong in bonds!)

PABRAI…GOING FORWARD

Pabrai’s portfolio is volatile; and, it will always be volatile so long as he sticks to his core strategy. While you or I may not always see the same value he does, that is what makes this game so interesting and potentially lucrative to so many people. (If we all saw the exact same value in the exact same investments, the markets would be efficient.)

So long as he sticks to his approach (and stays away from airlines), I am confident that he’ll outperform in the future.

THIS YEAR’S ANNUAL MEETING

On Saturday I’ll be attending the Pabrai Funds annual meeting here in Chicago. At this event, everyone has the opportunity to ask a question. So, what would you like me to ask? You can post your question in the comments or e-mail it to me. And if you are planning to attend, let me know and we can meet up.

ON A PERSONAL NOTE

Michel in Belgium e-mailed me a very simple question: Are you dead? I am not; however, I know that I have been invisible here – reading comments, but not posting. My activity seems to inversely correlate with the markets – as they go up, so does my ability to sit back and write my long-winded e-mails and posts. When the markets were in full-of-bull mode last year (take that how you want), I didn’t find a whole bunch in the way of opportunities; so, I’d open up Microsoft Word and start typing into the wee hours of the morning.

Please don’t take my inactivity as a lack of interest. At the very least, it is proof positive that now is the time to look for value!