In one sentence: Mohnish Pabrai's tiny, mostly cash portfolio shows what patience looks like in an expensive market, and why professional managers feel pressure to act that you don't have, while the episode also warns about how little a 13F tells you about cash and shorts.
Key ideas
- Why Pabrai. He openly teaches Buffett and Munger style investing (his book The Dhandho Investor), and he and Guy Spier bid on a charity lunch with Buffett. Phil says his returns ran above 25% a year for a long period. [02:30–05:00]
- Q3 2017 filing. The filing is about 90+ days old. It shows four stocks: Alphabet (about 50%), POSCO (about 31%), Southwest Airlines (about 12%) and Berkshire (about 8%). That's 100% in the top five. [05:00–07:00, 12:00–14:00]
- A 13F hides the cash. It lists stock holdings but not total portfolio size, cash or shorts. Phil estimates about $136 million in stocks against a roughly $1 billion fund, so about 86% would be cash. He is guessing, so treat the number as a rough one. [07:00–10:00]
- Fully invested vs waiting. Mecham and Spier stay fully invested. Phil guesses Spier prefers to be down less than the market than to risk missing the gains. Phil says this is his reading and not Spier's words. [10:00–12:00]
- Waiting is the hardest thing. Pabrai's book says to wait. Phil uses Buffett's "swing, you bum" image of a batter watching pitches go by while the stands scream. Small investors don't have anyone yelling at them. [14:00–16:00]
- Cash costs relative returns. Phil's math: a 20% gain on 14% of a fund contributes only a few points when the market is up about 17%. Investors in a fund may rebel (the "Big Short" Michael Burry story). [15:30–17:30]
- Activity matters. The activity view shows when a guru last bought. Pabrai's last purchase was about a year earlier. In early 2017 he only sold, exiting Seritage (Phil owns it and says it's a risk if Sears fails). Gurus often do nothing for quarters at a time. [17:00–24:30]
- Institutional imperative. Phil says most fund managers are under pressure to do something brilliant every quarter, from clients and from their employers. Danielle points out that this makes their behaviour rational, since they respond to incentives, and not irrational. Phil credits her with the insight and says he had thought the opposite managers were just wrong. [19:00–21:30]
- Dollar-cost averaging looked smart in 2017. Phil says it won't hold up through a downturn, and warns that people near retirement lack the time to recover from ten flat years. He says he has no crystal ball. He thinks the market is better than 50/50 to rise more next year. [24:30–27:30]
- Where Phil deploys cash. Not in a high market but in "special situations" (assets made cheap by a tax rule or legislation), and in small, low-risk option trades such as Rule #1 puts and calls. Small portfolios can do this and a billion-dollar one can't. [28:00–30:00]
- Market valuation gauges. Total market value divided by GDP: about 60% is a great time to buy, 120% isn't, average about 70–80%, and Phil quotes about 155% at that time. Shiller P/E about 32 against a long-run average near 16. Phil says it has been this high only three other times, each followed by a crash. [30:00–31:30]
- A crash isn't doomsday. It's a repricing, as in 2002–03. Be ready to buy. [31:30–32:30]
- Anti-fragile. Nassim Taleb's idea, which Phil applies to Pabrai's portfolio, is that you gain from the storm. Pabrai's cash lets him buy the crash while losing out on the rise. [32:30–34:00]
- Small companies are the small investor's edge. Big funds can't build a meaningful position, and a doubling in a $50 million company barely moves them. Analysts don't cover these names, so news sneaks up. Phil's advice for a learner: start with larger names where a guru is also invested, and be wary if you're the first one in. [34:00–37:00]
- Investing is emotional. Fear on the way down and greed on the way up are the main things to manage, and few people talk about them. Phil prefers being pessimistic and prepared. [37:00–40:30]
How it maps to RuleOne
- Cash is a position. A screen showing "no buys" or an empty watchlist when prices are high is acting like Pabrai. The site's holdings page should show cash as part of the portfolio.
- The market-valuation gauges (market cap to GDP, Shiller P/E) are context for how many names should clear the margin-of-safety bar. The screen doesn't compute them.
- The Rule #1 puts and calls are the options routine Phil mentions. RuleOne doesn't automate options.
Buffett, Munger and Graham links
- Buffett's "swing, you bum" batter image comes from his talks on waiting for the right pitch (the Ted Williams strike-zone idea). Phil retells it loosely, so check the source before quoting.
- Institutional imperative: Berkshire 1989 letter, with Buffett's account of why managers imitate each other.
- Market cap to GDP: Buffett's Fortune article, December 2001, calls it "probably the best single measure". He has said it is not a timing tool.
- Graham's The Intelligent Investor (chapter 8, Mr. Market) gives the same temperament: act on price, not on pressure.
Words to know
- Institutional imperative: Buffett's term for the pull on managers to imitate peers and keep busy.
- Anti-fragile: Taleb's term for something that gains from disorder.
- Special situation: an asset that is cheap because of a one-off reason such as a tax or legal change.
- Shiller P/E (CAPE): price over ten-year average real earnings.
Try this
On Holdings, add your cash to your list of positions and work out the percentage. Ask what you would need to see to put 25% of it to work, and write it down as a rule before the market tempts you.
Check yourself
- What can't you learn from a guru's 13F?
Answer
The total portfolio size, how much is cash, and any short positions. - Why are managers' actions "rational" even when they look like mistakes?
Answer
They respond to incentives: clients and employers judge them quarterly, so doing nothing is risky for their jobs. - Why might small companies suit an individual investor?
Answer
Big funds can't take a meaningful position in them and analysts rarely cover them, so mispricing can persist. The cost is news arriving unannounced and larger swings.
Short quotes
"Swing, you bum." (Phil, quoting Buffett's image of fans yelling at a patient batter, ~15:00, auto-transcribed)