Semi-Annual Investor Call Transcript – March 14, 2024 — Summary & Takeaways

Question 1: Opening and Background — Positioning and Initial Performance of the Pabrai Wagons Fund Since Inception

Context: This is the first semi-annual investor conference call for the Pabrai Wagons Fund since its inception on September 29, 2023. In his opening remarks, fund manager Mohnish Pabrai introduces the fund's background, investment philosophy, portfolio structure as of December 31, 2023, and preliminary performance from inception through the end of February 2024 to new investors. He explicitly states that answering investor questions is the core of the meeting, but first provides background information as context.

Response and Views:

Investment Objective: The fund seeks to invest in businesses with durable growth, strong reinvestment engines, and high-integrity management teams, aiming to purchase partial ownership of these businesses at prices significantly below intrinsic value. Occasionally, it also participates in special situation investments (e.g., merger arbitrage).
Portfolio Structure (as of December 31, 2023): The fund has invested in 20 high-quality companies across the United States, Turkey, Canada, and Europe. 76% of the portfolio is concentrated in four core sectors:

1. Leading Turkish Companies: Including Coca-Cola İçecek (a global Coca-Cola bottler operating in 11 countries), Anadolu Efes (Turkey's largest beer brand), and TAV Airport (a Turkish airport operator managing airports in 8 countries).

2. U.S. Coal Companies: Including CONSOL Energy, Alpha Metallurgical Resources, Warrior Met Coal, and Arch Resources (covering both thermal and metallurgical coal).

3. U.S. Auto Dealers: Including Asbury Automotive, Lithia Motors, and AutoNation.

4. North American and European Tech Stocks: Including Microsoft, Amazon, Constellation Software, Topicus, and Tiny.

Core Logic: Pabrai notes that the first three sectors (Turkey, coal, auto dealers) represent corners of the market that are misunderstood, leading to mispricing. He explicitly states: "We love businesses that are hated, that are unloved," and plans to "circle the wagons" around these three sectors, meaning concentrated holdings with high conviction.
Preliminary Performance (as of February 29, 2024):
From inception (September 29, 2023) to February 29, 2024: Retail class shares rose 18.33%, institutional class shares rose 18.45%, while the S&P 500 rose 19.63% over the same period, with the fund slightly lagging.
From the start of 2024 to February 29, 2024: Retail class shares rose 9.74%, institutional class shares rose 9.75%, while the S&P 500 rose 7.11%, with the fund outperforming.
Commentary on the S&P 500: Pabrai believes the S&P 500's recent performance far exceeds its long-term average, primarily driven by the "Magnificent Seven" (Nvidia, Meta, Apple, Alphabet, Microsoft, Amazon, Tesla), which account for approximately 29% of the index. He argues that while these companies are excellent, they are fully priced or even overvalued. In contrast, the Wagons Fund holds only two of them (Microsoft and Amazon), with a combined position of about 7%, yet has still outperformed the index year-to-date. He cautiously notes, "This is a very short period, but we believe the ship is sailing in the right direction."
Investment Philosophy: Pabrai reiterates his core belief — exceptional investment performance typically stems from a few great investments held for the long term. The key is not only to find these investments but also to not sell them. He hopes the fund will be wise enough to hold the companies in its current portfolio for the long term.

Reasoning Process and Limitations:

Pabrai emphasizes that the fund has only been in existence for five months, which is too short a period to make any meaningful performance assessment, but "the start is good."
He explicitly states that the fund's holdings and allocations are subject to change at any time and should not be considered buy or sell recommendations.
The performance data is accompanied by lengthy legal disclaimers, including fee structures (retail class WAGNX gross expense ratio 4.74%, net expense ratio 1.25%; institutional class WGNIX gross expense ratio 4.22%, net expense ratio 1.00%), as well as expense cap agreements. These are compliance requirements and do not affect the analysis of investment logic.

Key Data and Examples:

Inception Date: September 29, 2023.
Number of Holdings: 20.
Core Position Weight: 76%.
Performance Comparison: From inception to end of February 2024, the fund (+18.33%/+18.45%) slightly lagged the S&P 500 (+19.63%); from the start of 2024 to end of February, the fund (+9.74%/+9.75%) outperformed the S&P 500 (+7.11%).
Magnificent Seven Weight in S&P 500: Approximately 29%.
Fund's Holdings of the Magnificent Seven: Two companies (Microsoft and Amazon), with a combined position of approximately 7%.

Question 1: Why does the fund heavily invest in coal stocks? How should the sector's sustained performance be viewed?

Context: Investor Fahad Missmar, representing fund holders, noted that the coal sector is currently out of market favor, yet the fund holds concentrated positions in four coal companies: Alpha Metallurgical Resources, Arch Resources, CONSOL Energy, and Warrior Met Coal. He inquired about the logic behind this allocation and how long the coal sector can continue contributing positive returns to the fund.

Response: Mohnish Pabrai replied that the fund does not base decisions on whether a sector is "in favor," but rather focuses on the gap between a company's intrinsic value and its market price. He explicitly stated that these coal stocks are a "no-brainer" at current prices.

Reasoning: Pabrai used a simplified model to illustrate his investment framework—assuming a company can survive for 40–50 years, eventually reaching zero value, but generating an average of approximately $1 billion in free cash flow annually during that period (with some years at $500 million, $2 billion, or $200 million), totaling cumulative cash flows of around $40–50 billion. If such a company could be purchased for $3–5 billion, the fund would build a large position. He applied this logic to coal stocks, implying that the cumulative cash flow potential of these companies far exceeds their current market capitalizations.

Conditions and Follow-up: Pabrai declined to discuss specific position details further for two reasons: first, the fund is still actively buying these stocks (as new capital comes in), and second, he prefers to buy at lower prices rather than drive up the stock price. Similarly, most of these companies are repurchasing their own shares, and Pabrai is pleased to see them doing so at low prices. He did not provide a specific timeframe for the coal sector's "continued outperformance," but emphasized that the fund will hold as long as there is a significant gap between price and intrinsic value.

Question 2: On Turkish Holdings—Why Anadolu Efes Instead of Reysas?

Question and Context: Host Fahad Missmar, speaking on behalf of investors, directly asked about the fund's logic behind its Turkish holdings: why the fund holds Anadolu Efes but has not bought Reysas (a Turkish logistics and warehousing company).

Answer and View: Mohnish Pabrai first explained the compliance and ownership restrictions for not holding Reysas, then clarified the investment logic behind choosing Anadolu Efes.

Reasoning Process and Constraints:

1. Reasons for Not Holding Reysas (operational constraints, not an investment judgment):

Compliance Restrictions: Pabrai manages multiple private funds, and SEC rules prohibit him from discussing specific details of private funds in such public forums, so he cannot elaborate.
Ownership Caps: In multiple countries, regulations require that all accounts managed by Pabrai be aggregated for ownership calculations in the same company. For a small company like Reysas, existing accounts have already reached the ownership cap, preventing the newly established Wagons Fund from buying more.
Management Preference: Pabrai revealed that all funds collectively hold approximately one-third of Reysas's shares, and the company's management may not want this stake to increase further, which is another limiting factor.

2. Investment Rationale for Anadolu Efes:

Business Position: Anadolu Efes is a dominant beer brand in Turkey, Russia, Ukraine, and several other countries.
Risk/Reward Assessment: Pabrai believes that the future cash flow prospects of the business, compared to its current market price, offer an attractive risk/reward ratio. This is the core basis for their investment decision.

Key Data: All funds collectively hold approximately one-third of Reysas's shares.

Question 3: Why invest in large-cap stocks like Microsoft and Amazon with such small positions? Their long-term returns have limited impact on the overall portfolio. What is the logic behind this?

Answer and Perspective: Mohnish Pabrai acknowledges this as a good question and points out that mutual fund investment rules are the core reason. These rules limit the maximum position size for any single stock and require funds to maintain a certain degree of diversification. Pabrai considers these rules to be "very good rules" because they protect the general public investor (Joe Public) from fund managers arbitrarily scaling positions to any size. Within these constraints, he believes that the allocation to Microsoft and Amazon is already the best arrangement "within his power."

Reasoning Process:

The implicit contradiction in the question is that Microsoft and Amazon have enormous market capitalizations. Even if they achieve a 3-5x increase over the next 10-20 years, a mere 3% position would contribute limitedly to the overall portfolio.
Pabrai does not directly refute this judgment. Instead, he attributes the decision to an external regulatory framework rather than an active choice. He implies that, without such restrictions, he might adopt

Question 4: How to Understand "Long-Term Holding," Especially for Positions Like Thermal Coal and Auto Dealers That May Face Industry Transformation?

Context: Host Fahad Missmar, speaking on behalf of investors, noted that the "moat" concept implies long-term holding of stocks within the circle. However, the fund's current holdings in thermal coal and auto dealers face fundamental industry shifts (EV substitution, energy transition), with future revenues potentially stagnating or shrinking—like "melting ice cubes." The investor questions: For such "bets," how does Mohnish define "long-term"?

Mohnish Pabrai's Response:

Core Judgment: Mohnish explicitly states that he does not view these positions as "melting ice cubes." He believes the market holds distorted views on the auto dealer and thermal coal industries.
On Auto Dealers:
He does not believe auto dealers will disappear. Even if 100% of vehicles are electric (EVs), the parts and repair service business will not vanish.
He believes a 100% EV world will not emerge for decades.
Therefore, he does not foresee any decline in the auto dealer industry for 10 years or more. Given the current low valuations and some companies' share buybacks, he is very willing to hold these positions within the "moat."
On Thermal Coal (Holding Only CONSOL Energy):
Business Nature: Most of CONSOL's coal is exported, and a significant portion is not used for power generation. Thermal coal has many industrial uses, many of which lack good substitutes.
Asset Quality: CONSOL owns one of the highest-quality thermal coal assets globally.
Management Team: It has an outstanding management team.
Business Model: The company pre-sells its production 12 to 18 months in advance, setting ranges for minimum and maximum selling prices. For example, before 2024 began, it already knew the lower and upper bounds of 2024 cash flow. For 2025, 30%-40% or more of production has already been pre-sold, and it expects most of 2025's production to be pre-sold within the year.
Capital Allocation: The company has virtually no meaningful debt and follows a simple philosophy of using all cash flow not needed for operations to repurchase shares.
Conclusion: Given the stock price level, cash flow stability, asset life, and the fact that its coal is not primarily used for power generation (thus not a "melting ice cube"), he is very comfortable holding CONSOL.

Question 5: Was the investment in Spirit Airlines based on its merger with JetBlue? Is it still attractive after the merger was called off?

Question & Context: Fahad Missmar asked whether the investment in Spirit Airlines was purely a merger arbitrage bet, and whether Mohnish still sees value in Spirit after the merger was blocked.

Answer & View: Mohnish Pabrai explicitly acknowledged that this was a merger arbitrage bet. At the time of placing the bet, they believed the odds of the merger being approved were in their favor. After the merger was blocked, Spirit's stock price fell sharply, and the investment thesis no longer held.

Handling & Data:

Mohnish swapped Spirit stock for Spirit bonds, replacing the original equity position with bonds.
The bet was initially small, accounting for about 4% of the fund's total assets.
As no additional capital was deployed and the fund's assets have grown, this position now represents a very small percentage of the portfolio.

Key Rationale: Mohnish did not express a long-term bullish view on Spirit itself (whether stock or bonds), but rather treated the bonds as a passive disposition after the original arbitrage logic failed.

Question 6: Why was the decision made to establish a mutual fund, and how was the fee structure determined?

Context: Host Fahad Missmar, representing investors, asks Mohnish Pabrai

Question 7: How Should Long-Term Investors Prepare for a Bear Market or Correction?

Context: Investor Fahad Missmar asks how the Pabrai Wagons Fund should handle the impact when the market enters a bear market or correction, given a long-term investment horizon of 10 years.

Response: Mohnish Pabrai believes that the fund’s fate is highly correlated with its top 12 to 15 core holdings, which are concentrated in sectors previously discussed (Turkish leading companies, U.S. coal companies, U.S. auto dealers, and North American and European tech stocks). If the majority or a significant portion of these core holdings ultimately prove to be correct judgments, the fund’s long-term performance will be solid.

Reasoning: Pabrai acknowledges that when the overall market declines, the fund’s net asset value may also fall. However, he emphasizes that over the long term, the fund’s performance ultimately depends on the fundamental performance of the businesses it invests in, not short-term market fluctuations. This implies that investors should not attempt to avoid market corrections but should instead focus on the quality of the underlying businesses. He does not provide specific hedging strategies or defensive maneuvers, instead stressing the importance of holding high-quality companies for the long term and relying on the growth of intrinsic business value to navigate market cycles.

Question 8: Long-Term Considerations on Fund Size and Performance

Questioner (Harry Woo) noted that both Buffett and Munger have mentioned that when a fund becomes too large, outperforming the index becomes difficult. He asked Pabrai whether the Pabrai Wagons Fund has a tipping point at which he would consider it challenging to achieve the expected excess returns.

Mohnish Pabrai's response was very direct. He fully agreed with this view and clearly stated:

There is a direct negative correlation between size and performance. He personally would not be excited about managing a fund with a very high probability of failing to beat the index.
He believes that when a fund becomes very large, outperforming the index becomes extremely difficult.
His coping strategy is to play it by ear. He will continuously observe the relationship between the set of investment opportunities, the fund's performance, and its current size.
If the situation develops to a point where he finds it difficult to overcome the challenges posed by size, he is perfectly comfortable with stopping capital inflows—that is entirely fine with him.

Pabrai Wagons｜投资者电话会逐字稿｜2024-03-14

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