Delaware

Q&A; QUESTIONS: 1. MOHNISH: What is this about your grandfather being a well-known itinerant magician? What is his story and what wisdom did you glean from him? 2. SECRETARY: Warren Buffett in his 1983 Berkshire Hathaway Letters to Shareholders describes economic goodwill as, “… a business logically is worth far more than net tangible assets when they can be expected to produce earnings on such assets considerably in excess of market rates of return. The capitalized value of this excess return is economic Goodwill.” Section 936 benefits developed Puerto Rican academic hard sciences in the University of Puerto Rico to a level comparable with the United States through a thriving pharmaceutical industry that still generates economic Goodwill for the local economy today. Thus, the high potential of a bilingual Puerto Rican workforce in a service export economy would generate significant economic Goodwill under the right management. What other ways have the current tax incentives such as Act 20 and 22 created economic Goodwill for the island? 3. MOHNISH: Benjamin Graham offered a simplified approach to value investing in 1976 at an academic conference when he said, “My first, more limited, technique confines itself to the purchase of common stocks at less than their working-capital value, or net current-asset value, giving no weight to the plant and other fixed assets, and deducting all liabilities in full from the current assets. We used this approach extensively in managing investment funds, and over a thirty-odd-year period we must have earned an average of some 20% per year from this source. In January 1976 we counted over 100 such issues in the Standard & Poor’s Stock Guide — about 10% of the total. I consider it a foolproof method of systematic investment — once again, not on the basis of individual results but in terms of the expectable group outcome.” Graham’s full presentation is printed in Graham, Benjamin. 1976. Financial Analysts Journal 32(5). 20-23. Stocks with market capitalizations less than working capital can be found on the Value Line bargain basement list. Do you also peruse the Value Line bargain basement list or other filtering lists such as these? If so, which lists are your favorites? 4. SECRETARY: You are known to be a leader of successful company turnarounds in the private sector. Now you are President of the Government Development Bank; an institution in much need of a turnaround. You have talked about bringing innovative alternatives and viable solutions that will change the status quo of the institution in the future. Can you share with us your vision and some of the initiatives you bring to bank management? 5. MOHNISH: Warren Buffett’s mentor and Columbia University finance professor, Benjamin Graham writes that "The function of margin of safety is in essence, that of rendering unnecessary an accurate estimate of the future." How do you seek a margin of safety? How does this relate to your strategy of “few bets, big bets, and infrequent bets” on Page 46 in your book, “The Dhando Investor?” 6. SECRETARY: A recent study in a prominent finance journal analyzed the headquartering decision for large Fortune 500 firms with respect to Delaware. The research highlighted the great complexity of the decision to headquarter the firm based on tax advantages alone. Within this framework Puerto Rico obviously has a lot of competition. Yet when we listen to the local news in Spanish we hear lots of reports that too much has been given away to the people with decrees under Acts 20 and 22. The research contradicts this viewpoint and in fact shows that business luminaries such as Mohnish Pabrai must be given adequate incentives to move their firms away from Silicone Valley or Stockholm. Do you think the government is giving away too much? 7. MOHNISH: University of British Columbia and London School of Business Professor William Ziemba analyzes your Stewart Enterprises investment in his 2015 article entitled “Response to Paul A Samuelson Letters and Papers on the Kelly Capital Growth Investment Strategy” published by the London School of Economics and Political Science Systemic Risk Centre explains that "The optimal Kelly bet is 97.5% of wealth and half Kelly is 38.75%. Pabrai invested 10% [See The Dhando Investor page 114]. While this seems rather low, other investment opportunities, miscalculation of probabilities, risk tolerance, possible short run losses, bad scenario Black Swan events, price pressures, buying in, and exiting suggest that a bet a lot lower than 97.5% is appropriate." He seems to have concluded that you are a fractional Kelly bettor. Is this true? And, why haven't you taken as large of positions as Buffett, Graham, Soros, or Keynes?

• published: 23 Jan 2017
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