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I follow a lot of investors. I particularly like those that take a business valuation approach to investing and concentrate their portfolios. I feel quite strongly that value investors who run concentrated portfolios produce the best (and safest) ideas as they have the most capital at risk on each investment.
So I follow the usual suspects. Bruce Berkowitz, Bill Ackman, David Einhorn, Seth Klarman and of course Buffett are a few examples. But my heart always belonged to my favorite, Monish Pabrai of Pabrai Funds.
Why do I like Monish so much? Simply because he is a great story.
In 1991 with $30,000 from his 401k and $70,000 of credit card debt he founded an IT consulting and systems integration company called Transtech Inc. Around 2000 he sold Transtech for $20 million.
After Transtech Pabrai started his fund on a lark in the late 90s with a million dollars under management. His investors were made up of himself, and a few friends. And Monish did more than ok with Pabrai Funds, turning $1 million in assets under management to over $600 million by 2007.
Of course the only way you can gather assets at that kind of rate is with knockout performance, and that is exactly what Monish had through 2007. And he achieved this performance with a super-concentrated portfolio based on having a theory of having 10 investments each with a 10% position weighting. Check out this interview where Pabrai discusses this idea.
Personally I think that 10 positions is enough diversification for an individual who has the background and time to manage his money full time. However that individual better be ready for a bumpy ride as that sort of concentration is going to be very volatile. And while I think that concentration might work for a personal portfolio, it is very difficult when you are managing money for other people. Such concentration might be fine when things are going well, but when the market collapses and your concentrated portfolio drops considerably more than the market life becomes very stressful. If it is your own money you can just sit on your hands because you know the market will eventually come back. If you are running a fund, your investors may not give you that luxury.
I think Monish had a very difficult couple of years through the financial panic of 2008 and 2009. His concentrated portfolio which included a couple of big mistakes on his part with CompuCredit and Delta Financial got hammered.
Fortunately for Monish and his investors, the Pabrai Funds have rebounded nicely since 2008/2009 and from inception to date the funds still widely outperform the S&P 500 (17.3% annualized since inception vs 1.1% for the S&P 500). But as all intelligent people do, Monish has made adjustments to a strategy that he was no longer comfortable with after living through the market collapse. Instead of using a 10 position portfolio, Pabrai has opted for a magic number of 20 stocks with large positions to rarely exceed 5%.
Even with the decrease in position sizing and the increase in number of holdings, Monish still has a very concentrated portfolio. And given how good his track record is through more than a decade of portfolio management, that to me makes his portfolio fertile ground for finding investing ideas. And with that in mind here is what his portfolio looks like from his last two quarterly SEC filings:
Value
%
Value
%
Holding
30-Jun-11
30-Jun-11
31-Mar-11
31-Mar-11
Change
Potash Corp (NYSE:POT)
$56,697,000
20.67%
$58,627,000
19.07%
0
Brookfield Properties (NYSE:BPO)
$45,487,000
16.59%
$41,806,000
13.60%
0
Brookfield Infrastructure (NYSE:BIP)
$44,332,000
16.17%
$39,324,000
12.79%
0
Goldman Sachs (NYSE:GS)
$30,722,000
11.20%
$17,583,000
5.72%
119,971
Cresud (NASDAQ:CRESY)
$20,891,000
7.62%
$23,283,000
7.57%
0
CapitalSource Inc (NYSE:CSE)
$18,145,000
6.62%
$19,804,000
6.44%
0
Horsehead Holding (NASDAQ:ZINC)
$18,082,000
6.59%
$23,145,000
7.53%
0
Wells Fargo and Co (NYSE:WFC)
$10,506,000
3.83%
$11,873,000
3.86%
0
Pinnacle Airlines Corp (PNCL)
$9,016,000
3.29%
$11,419,000
3.71%
0
Air Transport Services (NASDAQ:ATSG)
$8,466,000
3.09%
$11,985,000
3.90%
(182,464)
Posco (NYSE:PKX)
$7,680,000
2.80%
$7,349,000
2.39%
6,400
Brookfield Residential Properties
$2,396,000
0.87%
$0
0.00%
241,573
Harvest Natural Resources (NYSE:HNR)
$788,000
0.29%
$0
0.00%
71,401
Berkshire Hathaway (NYSE:BRK.B)
$764,000
0.28%
$276,000
0.09%
6,566
Wells Fargo Warrants
$274,000
0.10%
$160,000
0.05%
15,306
International Coal Group (ICX)
$0
0.00%
$28,069,000
9.13%
(2,483,970)
Terex Corp (NYSE:TEX)
$0
0.00%
$12,786,000
4.16%
(345,186)
Total
$274,246,000
100.00%
$307,489,000
100.00%
n/a
The links to the supporting SEC documents are here and here.

Over the past quarter Pabrai has not made a lot of changes to his portfolio. And he has a huge amount of capital invested in just three names Potash Corp (POT), Brookfield Properties (BPO) and Brookfield Infrastructure (BIP).
Potash is by far the largest holding that Monish is required to report on. In looking for ideas from this filing though this is one to be careful with, as most of the position was acquired in 2009 when the stock price was between $25 and $35. Today with the stock price over $50 it is likely not as attractive as a value investment.
Brookfield Properties, the second largest position on this list was mostly acquired in the second quarter of 2009. This would mean that Pabrai was purchasing at prices ranging from about $6 to $8 per share. With the stock price now at around $16 this has been at least a double for Monish and investors looking for ideas from him should be aware that they are looking at a much different entry price.
Brookfield Infrastructure however, was acquired in the final quarter of 2010. That would mean that Pabrai’s entry price was in the range of $17 to $22 per share. With the stock price today at roughly $25 investors could get in at a price close to what Pabrai thought was attractive enough to make it a pretty heavy weighting in the fund. At the current price Brookfield has a dividend yield of 5.5%.
But if you are looking for an idea from the Pabrai portfolio I think the most obvious candidate to try and do a deep dive on is Goldman Sachs (GS). Monish almost doubled his position in Goldman during Q2 2011 when the stock price ranged from $160 to $133. Since the end of June, Goldman’s stock price has dropped considerably, so investors can enter at a big discount to what Monish thought was attractive just a couple of months ago.
What has me especially interested in Goldman is that we don’t just have Monish interested we also have Bruce Berkowitz of Fairholme with Goldman carrying a big weighting in his fund. Here is some detail on the Fairholme portfolio. And on top of that we also have Warren Buffett still sitting on Goldman Sachs warrants that he received in 2008 and did not unload with Goldman Sachs stock price almost 60% higher than today.
I’m going to take a look further at Goldman. I’m not sure if I will buy the stock or not as I’m a little leery of whether I have the ability to truly understand the balance sheet of the company or exactly how predictable its earnings is. All I really know at this point is that Goldman is a bunch of super smart guys, crammed inside of a black box that spits out money. But if Goldman is good enough for the money of Pabrai, Berkowitz and Buffett it is at least worth a look for me.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Source: A Dive Into The Pabrai Portfolio Reveals Discounted Prices On Some Picks