Mohnish Pabrai on Bubbles & Crashes

I put those dilapidated certificates in the bottom shelf of a filing cabinet and did not open that drawer for several years. It was helpful to not have the shares available in a brokerage account. The effort required to sell them helped me hold on with zero activity for several years. When Pabrai Funds started in July 1999, the tech bubble was heading towards a crescendo. Just eight months after we launched, the Nasdaq would top out at over 5000 and eventually bottom out at 1114 in 2002 - down 78% from its March 2000 peak. As the funds launched in 1999, I was able to sidestep the aftermath by focusing on being a Grahamian investor. Instead of buy and hold, I focused on buying dollar bills for 50 cents or less and selling them for 90 cents or more. This worked very well. From inception in 1999 through March 2018, $100,000 dollar invested in PIF2 turned into more than $1.8 million – after my ridiculous fees and all expenses. Now it is $1.4 million. All three funds beat virtually all the indices from inception through 2017 over one, three, five or ten years or life of funds1. For the first nineteen years, we outperformed regardless of whether we had $1 million in AUM or $600 million. When I look back at the full 21+ year history of Pabrai Funds, we’ve had two periods of two years each when we’ve seriously underperformed the indices. The first was during the financial crisis of 2007-09 and the second was from April 2018 to March 2020.

They specialize in “Digital Strategy”. While they never had many dot-com clients, many DTPI clients needed DTPI to help them evolve from Brick and Mortar to Click and Mortar. DTPI is one of the leading firms in the digital strategy space. So while McKinsey etc. were more established, DTPI was nimbler and far more focused on an area of tremendous pain for many companies. • DTPI recruits consultants from the top MBA schools. They pay their junior consultants between $120,000 - $150,000 per year. These folks generated billings around $387,000/year/person in 1999. They make a nice spread. 50% gross margin! About 50% of DTPI turnover is forced. Every year they ask the bottom 5-8% of their workforce politely to leave. Its the typical McKinsey “up or out” format. If you do this systematically over the years, you end up with a better workforce every year.6

regardless of the relationship between IV and Market Value believing that eventually Intrinsic Value and Market Value would be in sync. The flaw is that if we are holding a business that the market is valuing at a significant premium to Intrinsic Value, then we are almost sure to see a drop back to Intrinsic Value. So in Q32000, I changed my modus operandi and decided that I will not hold equities at significant premiums to Intrinsic Value. Its unfortunate. This change will lead to us selling what are still great businesses due to Mr. Market’s mood swings. In addition there were a couple of events that give me some thought for concern. They are not big issues, but they are at the back of my mind. • DTPI did not have a big dot com client base, but their traditional clients were through Q22000 spending a lot of $$$ with DTPI because of the “dot com scare”. The Fortune 2000 was scared. As Q32000 came around and dot coms started to fold, these traditional companies have seen the pressure ease off from their shareholders and boards and some may curtail digital strategy spending. I see this as an issue, but not a big issue. • DTPI announced a major European acquisition in Summer 2000. Having run a “people business” I’m very skeptical of acquisitions in the space. It seems like a good match, but most acquisitions don’t work. DTPI has very talented managers. They may pull it off. Again an issue, but not a major one.