This is a transcript of Pabrai Wagons fund's investor call. Manager Mohnish Pabrai discusses holdings. He prefers Warrior Met Coal over Alpha Metallurgical Resources due to lower mining costs and better transport routes, despite Warrior's dividend focus (dividend tax inefficiency doesn't change his view). Offshore drilling positions (Transocean, Noble, Valaris) total over 19%; he doesn't plan to exit soon, as buy prices are far below replacement cost. Constellation should be valued on free cash flow, not P/E, with entry below 20x cash flow. Reysas has opaque disclosure but excellent management, bought below book value. Gimat was increased to over 25% due to expansion potential, though it's a venture bet. TAV Airports faces temporary headwinds (engine issues, plane shortages) but its operating leverage thesis remains intact. Kaspi has a decent shot in Turkey; even if it fails, the base business is cheap. Edelweiss' spinoff logic is slow but still valid.
This report discusses the investment logic and core views behind several holdings in the Pabrai Fund portfolio. Key conclusions include: Warrior Met Coal benefits from a longwall mining cost advantage (transportation costs of $15–$30 per ton) and dual transportation routes, with a position size doub
Question and Context
The host observes that the fund's weight in Warrior Met Coal is roughly twice that of Alpha Metallurgical Resources, with Alpha focusing on buybacks and Warrior on dividends. The host raises four follow-up questions:
1. What is the rationale for the larger weight?
2. Which management team treats shareholders more as partners?
3. Does the tax inefficiency of dividends alter the compounding calculation?
4. If forced to choose one, which would it be?
Answer and Reasoning
Pabrai first notes that one cannot judge the merits solely by buyback or dividend policies; the key difference between the two companies lies in cost structure and transportation infrastructure.
Warrior uses longwall mining, while Alpha uses room and pillar mining. Longwall mining has significantly lower costs but requires larger ore bodies. Warrior's pure mining costs are in the bottom quartile of the global cost curve, with only a few export metallurgical coal mines having lower costs.
Coal is a bulky commodity, making transportation costs critical. Warrior can ship coal to the Port of Mobile via rail or barge, giving it two transport routes; Alpha relies on a single railway, which charges based on a percentage of revenue rather than a fixed per-ton price.
Specific data: Warrior's mine-to-port transport cost is $15–30 per ton; Alpha's low-end cost is roughly $25–30 per ton, with the high end reaching $60 per ton. Pabrai emphasizes that the key metric determining competitiveness is the cost when the coal hits the water—once on the water, transport costs converge. On this dimension, Warrior has a clear advantage.
Both management teams are shareholder-oriented and focused on capital returns. Warrior was previously constrained by net operating losses (NOLs) and could not easily repurchase shares until April 19, 2024, making dividends the preferred route. However, Pabrai believes Warrior wants to first build up its cash balance (possibly for another quarter or two), after which dividends may increase, and buybacks could come into view.
Regarding dividend tax efficiency, Pabrai does not elaborate directly but implies that tax efficiency does not affect the compounding calculation—Warrior's cost advantage is large enough that even with dividends alone, he would still rate it higher.
Pabrai states clearly: if forced to choose one, he prefers Warrior, due to its cost advantage providing a higher margin of safety.
Context & Situation
The questioner notes that Noble and Transocean together account for approximately 17% of the fund, and that offshore drilling has historically been a capital-intensive industry with low returns on assets. They ask Pabrai whether this investment is intended as a long-term compounding play or a Ben Graham-style undervaluation repair trade—i.e., exiting once the price recovers to near replacement cost.
Response & View
Mohnish Pabrai first clarifies the position size: the fund currently holds three positions in offshore drilling—Transocean, Noble, and Valaris—totaling over 19%, close to one-fifth of the fund's assets. He explicitly states that he does not plan to exit these positions in the near term and believes that, from their purchase price, these businesses can generate excellent returns.
Reasoning & Counterexamples
Pabrai refutes the notion that capital-intensive industries are automatically bad businesses, offering three counterexamples:
He thus emphasizes: one cannot dismiss a business solely because it is capital-intensive; the key lies in whether the purchase price is sufficiently low.
Key Data & Cases
Industry Judgment & Holding Logic
Pabrai references a core argument within the industry: the last drillship ever built by humans may already have been constructed. If this judgment holds, and if humans continue to drill for oil over the next 30–50 years, the existing fleet of drillships will remain scarce for an extended period, potentially making these companies "truly exceptional businesses." Therefore, he is optimistic about the risk-reward profile of these positions and is willing to hold them long term to achieve good returns.
Conditions & Uncertainties
Pabrai's holding logic depends on two key premises: ① the industry indeed ceases to build new drillships; ② demand for oil drilling persists for decades to come. He does not discuss an exit plan if these premises fail, nor does he provide a specific holding period or target price.
MOHNISH PABRAI points out that using the P/E ratio to evaluate Constellation is incorrect, as its income statement includes substantial non-cash goodwill charges that distort the true economic picture. A more appropriate metric is free cash flow. Measured by free cash flow multiples, buying Constellation is highly attractive, "far from 40x, and even below 20x."
Regarding organic growth: Excluding acquisitions, the business has historically grown organically by approximately 3% annually. Pabrai sees no reason to believe future organic growth will fall below 2%–3% per year. For a business capable of growing cash flow by 2%–4% annually, under the current interest rate environment, he believes a reasonable valuation multiple should be between 10x cash flow (on the low side) and 15–17x cash flow (on the high side), with the midpoint being appropriate.
Regarding the acquisition-driven second growth engine: Constellation can use its internally generated cash to optimize and adjust acquired targets, effectively buying these businesses at 4–5x cash flow or even lower. This implies a reinvestment rate on its cash flow of 20%–25%, which is exceptional.
Overall assessment: Combining the stable organic growth business with this high-return acquisition engine makes Constellation an "extremely high-quality business," which is why Pabrai is bullish on it.
Question and Context: The host notes that Reysas has very limited public information and asks Pabrai to assess its prospects under conditions of opacity, while also performing a "deep health check."
Answer and Viewpoint: Pabrai first cites the investment approach of his friends Nick Sleep and Zach—they sit in their office reading annual reports and only dive deep when they are "hit over the head with a 2x4," ultimately holding positions in Amazon, Costco, and Berkshire. Pabrai states bluntly that Reysas would never appear in such a portfolio because, from their perspective, Reysas's annual report "reads like a foreign language." However, he himself is entirely comfortable with this situation.
Reasoning Process and Basis:
1. Current State of Disclosure: Pabrai has communicated with Reysas management multiple times, suggesting they provide investor presentations or increase disclosure of position changes, but management has largely ignored these "gentle nudges." He himself is unwilling to apply greater pressure.
2. Core Judgment: Despite the lack of transparency, Pabrai believes Reysas's father-son management team are "exceptional capital allocators." They are only interested in opportunities that can generate annualized returns of 20-30% or higher (in USD or EUR) ; they occasionally accept projects yielding around 15% , but management themselves are dissatisfied with that. They have already created significant value in the past.
3. Valuation and Margin of Safety: Pabrai judges that even buying Reysas at full book value would be a very good investment. The Wagons Fund, however, bought in below book value, providing an additional margin of safety. Therefore, even if the current level of disclosure remains unchanged, he is "completely satisfied."
4. Risk Warning (Self-Constraint): Pabrai emphasizes that he is presenting only "bullish arguments," but "it is almost certain that not all of these companies will develop as I describe, and some will fail." The nature of capitalism is creative destruction; competition is fierce, and any business can decline. This is why it is a portfolio investment rather than a single bet.
Experience and Case Study: Pabrai uses the approach of Nick Sleep and Zach as a counterexample, illustrating that Reysas does not meet the screening criteria of traditional deep-value investors. However, he himself is willing to accept the cost of information opacity in exchange for exceptional capital allocation ability.
The questioner noted that Pabrai established a 5% position in Gimat at a lower price around the end of 2024, then increased the stake to 20% through averaging up after a multi-fold rise. The question asks for the logic behind quadrupling the position after such a large rally: whether the investment thesis was validated, or whether the underlying real estate value grew faster than the stock price.
Pabrai first corrected two factual errors in the question: the initial position was not established at the end of 2024, but about 10 to 11 months ago (i.e., in 2025); and based on the latest disclosures across all entities he manages, the stake exceeds 25%, not 20%.
He then explained the logic behind adding to the position. When he began buying Gimat, the company's market cap was around $70 million to $80 million, while the real estate not used for the grocery business or stores alone was worth approximately $70 million. Beyond the real estate, the business itself could generate about $10 million to $15 million in pre-tax profit, accompanied by ambitious growth plans. How to value that profit is key: assuming little to no future growth, Gimat might be fully valued at around a $200 million market cap; but considering its aspirations—such as opening 80 stores in Turkey over 10 to 20 years, and possibly entering Germany—while it is uncertain whether these can be achieved, if a crystal ball showed a high probability of success, buying even at the current market cap of over $300 million would be a great investment.
Pabrai used two analogies to illustrate this judgment: Walmart, even if bought at 200 times trailing P/E after its IPO, still performed extremely well; and Warren Buffett's acquisition of See's Candies for $25 million would have been a good deal even at $200 million. But these all depend on having a crystal ball-like ability to predict the future.
Pabrai believes that the Gimat investment carries an element of a venture bet: the company is in its infancy, with only two stores, has big ambitions, but operates in a difficult and highly competitive industry. He has met the founder-CEO, believes the company's DNA is excellent, and the performance of the two stores is also excellent, giving it an above-average expansion opportunity. The number of stores will likely exceed four in the coming years; if it reaches four to six stores in the next two to three years, the company will become a different entity: it could generate $20 million to $30 million in cash flow and demonstrate a visible growth trajectory, supporting a significantly higher valuation multiple.
Pabrai also acknowledges the uncertainty: he does not know how far Gimat can ultimately grow. He felt that, given the potential growth, not adding to the position might have been a "cardinal sin"; but it is also possible that in the future, he will find he bought at a fully valued or even overvalued level. For now, he likes the bet and is willing to hold, but there are no guarantees. He admits this is different from many other investments, but he likes it.
Question and Context
A shareholder asked: TAV Airports' share price has fallen 30% in USD terms over two years. Has the Iran-Middle East conflict harmed the business? Given that a significant portion of the portfolio is located near conflict zones, could a prolonged conflict permanently undermine the operating leverage thesis?
Answer and Perspective
Mohnish Pabrai clearly stated that TAV is an excellent business and that share price fluctuations should not be used to judge the business. He believes the current headwinds facing TAV are not closely related to the Iran conflict (though an end to the conflict or the Ukraine war would provide tailwinds). He listed three specific headwinds:
1. Pratt & Whitney Engine Issues: Multiple airlines operating at TAV's airports have been affected by Pratt & Whitney engine failures, with some aircraft grounded and repairs progressing slowly, leading to a decline in passenger traffic at Almaty Airport.
2. Boeing Production Bottlenecks: Boeing previously faced production difficulties, and while improvements have begun, there is a significant backlog. Airlines globally are generally short of aircraft. Low-cost carriers at TAV's airports have strong expansion ambitions but cannot obtain new planes.
3. Almaty Airport Fee Adjustments and Government Negotiations: When TAV took over Almaty Airport, international passenger fees were extremely low (less than 15%-20% of appropriate levels). The government wants to accelerate the recovery of the fuel business, and in exchange, it is helping TAV negotiate with airlines to significantly raise passenger fees.
Reasoning Process and Conditions
Pabrai believes these issues are all temporary and expects them to be resolved within the next 2-3 years: airlines will obtain the necessary aircraft, passenger traffic will recover, fee increases will improve unit economics, and any easing of conflicts would provide additional tailwinds. He also mentioned that the Turkish economy may perform better in the next 2-3 years and that current high oil prices are another headwind. He explicitly stated that he remains bullish on TAV, considering it a good business, and that the operating leverage thesis has not been permanently broken, only temporarily suppressed by multiple factors.
Context: Based on Pabrai’s long-term experience with Turkish operations, the host asks how he evaluates Kaspi.kz’s strategy and likelihood of success in Turkey.
Response and View: Pabrai first clarifies that he is not a Turkish business expert, but rather a “distant observer.” He judges Kaspi as a “great business” and believes it has “a decent shot” in Turkey, though the outcome remains to be seen.
Reasoning and Key Basis:
1. Market Differences: Turkey is a “non-digitalized economy,” distinct from Kazakhstan’s current state and WeChat’s situation in China. Different geographies, populations, and nuances increase execution difficulty.
2. Execution Capability: Kaspi has achieved “near-miraculous execution” in Kazakhstan and plans to replicate its success model in Turkey. The management team is excellent.
3. External Validation: Tencent (WeChat) recently took a stake in Kaspi, signaling its endorsement of Kaspi’s strategy.
4. Margin of Safety and Asymmetric Returns: Pabrai believes that even if the Turkish business fails completely, they will not lose money on the investment. The reasons are:
5. Analogy: Pabrai compares this investment structure to Gimat: paying the price (or even a discount) for the “base business,” while gaining an upside option from the success of the Turkish business. He likes this type of investment scenario.
Context: The moderator noted that the investment thesis of Edelweiss’s spinoff and value unlock has existed since the fund’s inception, yet almost no visible progress has been made, and no IPO for the core business has been announced. The moderator therefore asked Pabrai how he assesses the resulting opportunity cost and whether the thesis still holds.
Response and View: Pabrai acknowledged the slow progress but argued that the thesis remains intact. He first pointed out that Edelweiss has already successfully spun off once—Nuvama—whose current market capitalization exceeds that of Edelweiss itself. This demonstrates that the spinoff thesis may be difficult to detect in its embryonic stage but can ultimately materialize. He judged that similar scenarios are likely to occur several more times.
Reasoning Process and Key Details:
Question and Context: The questioner noted that Pabrai and Li Lu had conducted in-depth research on Micron, and that hedge funds had held it at certain stages, but the Pabrai Wagons ETF does not include it. The questioner wants to know: Has the AI data center turned Micron into a “rocket”? Does Pabrai regret selling too early, potentially missing a 10x gain?
Answer and View: Pabrai explicitly stated that he has no regrets about the decision to sell Micron. By the time the ETF launched in September 2023, the hedge fund had fully liquidated its Micron position. He distinguishes between two types of regret: he regrets selling Ferrari, Goldman Sachs, and BYD, but not Micron, because there were solid reasons to exit at the time.
Reasoning Process and Key Data:
1. Long-Term Holding and Returns: Micron was once the largest U.S. holding in the hedge fund, held for 6 years (2017–2023), during which it only achieved a double, with an annualized return of approximately 12–14%. Pabrai believes this fell far short of initial expectations.
2. Core Investment Thesis – Oligopoly Rationality: The central argument for investing in Micron was that the DRAM industry is an oligopoly of three players: Samsung (>50% share), SK Hynix (~25%), and Micron (~25%), making new entrants nearly impossible. Between 2017 and 2019, Pabrai traveled to Seoul multiple times to meet with executives from SK Hynix and Samsung, and also communicated frequently with Micron’s CFO. He observed that these three companies did not collude on pricing but were content with their existing market shares, with no intention of engaging in cutthroat competition. He used the Coca-Cola and Pepsi bottler case (from discussions with Charlie Munger) to illustrate: in 95–97% of regions, both bottlers made substantial profits; but in 3–5% of regions, one party’s attempt to grab share led to price wars, leaving both unprofitable. Thus, maintaining oligopoly rationality is critical.
3. Trigger for Selling: In 2023, Samsung changed its strategy, deciding to pursue more market share and growth, becoming more aggressive. The other two players immediately reacted, industry profits vanished, and cash flow turned to zero. Pabrai judged that “the core assumption had changed” and chose to “ring the register,” locking in gains.
4. Subsequent Developments (AI Demand): Pabrai acknowledges that the subsequent AI boom led to severe chip capacity shortages. All three players ramped up production but still struggled to meet demand, prices surged, and Micron earned supernormal profits. The massive capital deployed by Google, Meta, etc. (e.g., Google’s $80 billion investment in data centers) largely flowed to the “shovel sellers” (like Micron), and due to price increases, the real purchasing power of this capital was far lower than five years ago.
5. Current Assessment: Pabrai states that if he still held Micron today, he would continue to hold, as the tailwinds have persisted for some time. However, at current valuations, he is not inclined to buy. He believes the sell decision in 2023, based on the data available at the time, was rational, and that continuing to hold would have been “gambling.”
Experience and Case Study: Pabrai reviewed in detail his investment journey in Micron from 2017 to 2023, including meetings with executives from Samsung and SK Hynix, and conversations with Charlie Munger about oligopoly stability. He cited Munger’s recounting of Buffett’s research on Coca-Cola/Pepsi bottlers as a framework for understanding oligopoly rationality.
Conditions and Follow-Up: Pabrai emphasized that Micron’s subsequent rise was a “series of outlier events” that were not foreseeable at the time. He explicitly stated that there are no plans to repurchase Micron.
Mohnish Pabrai acknowledges this is an excellent question. He first notes that the issue with Micron has already been addressed in a previous response. He then candidly admits that he has long been "overdosing on Graham while underdosing on Munger," a situation that began to change around 2017-2018 under the influence of Nick Sleep.
The core change he made is: no longer selling when the stock price approaches or reaches perceived intrinsic value. He only considers selling when the price is "extremely and absurdly above intrinsic value." The reasoning is twofold: first, intrinsic value itself cannot be precisely calculated and may be erroneous; second, high-quality businesses are extremely scarce.
He explicitly states that when holding companies like Goldman Sachs or Ferrari, one needs to "hold them almost forever." For other highly favored companies in the portfolio, as long as their moats continue to grow, he will give them "a very long leash" and hopes to hold them for the long term. He emphasizes that this approach has dominated his capital management for at least 8-9 years and has been consistent throughout the entire lifespan of the Wagons ETF and Wagons Fund.
Mohnish Pabrai addressed this challenge, with the core argument being: One cannot simply define a company by the "cyclical stock" label; the key lies in whether its cost structure constitutes a moat.
He used Saudi Aramco as an analogy:
Pabrai directly applied this logic to his holdings:
Conclusion: These companies are not ordinary "cyclical stocks" but businesses with cost moats, provided that they are bought at the right time and at a reasonable price.
MOHNISH PABRAI responded that he does not deliberately avoid such companies but achieves similar effects through a different path. He noted that if the management of Constellation and Reysas can sustain a return on equity (ROE) above 20% over the long term, he would also be bullish on these businesses. Kaspi's operations built in Turkey also generate high returns on invested capital (ROIC). He admitted that he is unable to pay a high premium for such targets ("I am not able to pay up"), so the portfolio holds several companies with scale advantages and strong long-term performance, though they are not household names ("They are not names on the tip of your tongues"). However, he believes these holdings will yield favorable results.
Issue and Context: The moderator noted that one of Pabrai's core principles is "letting winners run," but ETF diversification rules impose limits on single position sizes, potentially forcing fund managers to trim when positions become too large. The moderator questioned whether this structural constraint conflicts with the "let winners run" philosophy.
Response and View: Mohnish Pabrai explicitly denies any such conflict. He explains that while ETFs and mutual funds do have numerous diversification rules and regulations, these rules generally do not mandate trimming solely due to position growth caused by market fluctuations.
Reasoning and Conditions:
Mohnish Pabrai finds this question interesting but difficult to answer. His response is:
1. Constellation Software: This is the easiest choice. Pabrai believes the company possesses "the most kick-ass DNA and business culture," is extremely shareholder-oriented, and is disciplined in capital returns and generating high return on equity (ROE).
2. Kaspi.kz: The second choice is more challenging. Pabrai states that if he had to pick one, based on its track record, Kaspi is equally outstanding in terms of personnel quality and achievements.
Context: A shareholder asked whether Mohnish Pabrai would attend value investing conferences in Europe to provide an opportunity for face-to-face meetings.
Response: Pabrai confirmed that he will attend the Pareto Energy Conference in Oslo, Norway, on September 16. He explained that his choice of this conference was not driven by the desire to meet shareholders, but rather by its high efficiency—he can meet the CEOs of nearly all offshore drilling companies in one day, all at the same venue.
Background: The questioner notes that the historical price spread between Australian Premium Low Volatile (PLV) and U.S. East Coast Low Volatile (USEC Low Vol) has persisted for several months, while the spreads for High Vol A and High Vol B are even more pronounced, with the latter being Alpha's core revenue source. The questioner wants to know whether this is a human bias in the Platts index or a market-equivalent relationship.
Pabrai's Response:
Issue and Context: The investor asks about the distribution policy of the WAGN ETF and how dividends received from portfolio companies are handled, further inquiring whether this is at the manager's discretion or mandated by the ETF structure.
Response and View: Mohnish Pabrai explains that to qualify for tax treatment as a Regulated Investment Company (RIC), WAGN must make a distribution once a year in December. This distribution must include nearly all ordinary dividend income and realized net capital gains.
Reasoning Process and Conditions:
Key Data and Limiting Conditions:
Mohnish Pabrai views this as a good deal, with the core logic being that Transocean has leverage (higher debt), while Valaris does not. Merging the two and having them run by Transocean's management team (which he considers superior) creates a "win-win" scenario. Pabrai is a strong supporter of this merger, and Wagons Fund holds positions in both Transocean and Valaris. He expects the transaction to close smoothly, with no current signs of obstruction, and the spread is narrow (indicating the market has already priced in a high probability of deal completion).