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Why Mohnish Pabrai kept faith in Rain Industries even after 65% plunge in 2018

, ETMarkets.com|
Jan 21, 2019, 10.50 AM IST
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Pabrai, Managing Partner, Pabrai Investment Funds, disclosed these figures in a letter to investors on January 16.

Highlights

  • At the start of 2018, these stocks were together valued at $144 million, $165 million and $151 million in PIF2, PIF3 and PIF4, respectively
  • Shares of Fiat Chrysler and Rain Industries came down by 34 per cent and 65 per cent, respectively, in the previous year.
  • Pabrai Investment Fund (PIF) 3 slipped by 41.90 per cent, The Pabrai Investment Fund II (down 35.30 per cent) and The Pabrai Investment Fund IV (down 22.80 per cent).
Year 2018 proved to be a litmus test for stock investors. While retail investors felt the heat of severe selling in midcaps and smallcaps last year, big names including US-based investor Mohnish Pabrai too found the going tough.

His fund Pabrai Investment Fund (PIF) 3 slipped the most by 41.90 per cent last year, followed by The Pabrai Investment Fund II (down 35.30 per cent) and The Pabrai Investment Fund IV (down 22.80 per cent).

Pabrai, Managing Partner, Pabrai Investment Funds, disclosed these figures in a letter to investors on January 16.

“Much of the decline can be attributed to irrational declines in the prices of our two largest holdings, Fiat Chrysler and Rain Industries,” Pabrai said in the letter. His funds held nearly 10 per cent stake in Rain Industries as of December-end 2018. Indian securities laws do not allow any single Foreign Portfolio Investor (FPI) to own more than 10 per cent of any listed business.

At the start of 2018, these stocks were together valued at $144 million, $165 million and $151 million in PIF2, PIF3 and PIF4, respectively. Shares of Fiat Chrysler and Rain Industries came down by 34 per cent and 65 per cent, respectively, in the previous year.

“The significant 2018 decline in the prices of these two positions is overwhelmingly responsible for our underperformance in 2018. These two stocks are also the reason why we significantly outperformed the market in 2017,” he said in the letter.

He added that Fiat Chrysler, in spite of the decline in 2018, has delivered over 5 times returns since they bought it in 2012. Rain Industries was bought at about $0.60 per share in 2015 and traded at over $7 in January 2018 and $1.95 at the end of the year. Even after the 70 per cent decline for the whole year, it is up over 3 times since they took position.

What stopped him selling Rain Industries? Pabrai said he knew the business and its leader, Jagan Reddy, a lot better over the last few years.

“In the last 3+ years that we have owned Rain, I have seen Jagan Reddy (Rain’s Managing Director and 40+ per cent shareholder) make one smart decision after another. In fact, I have never seen Jagan make even one dumb decision. He has made very large capital allocation calls over the last 12+ years and they have been flawless. It is a remarkable record. He is a dream manager,” Pabrai reasoned.

All three funds significantly underperformed the benchmark indices in 2018. S&P500, Nasdaq and Dow Jones declined 4.4 per cent, 2.80 per cent and 3.50 per cent, respectively, during the whole year.

PIF 2 and PIF 4 are closed for new investors (or additions from existing investors), and only PIF3 is open to new money from existing or new investors.


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