During the course of my weekend reading, I came across an interesting note from Mohnish Pabrai. It seems that he ran into Charlie Munger not long ago at an event. I have more in common with the curmudgeonly, plain-spoken, less-than-politically-correct Munger than the folksy Warren Buffett, and I am a big fan of his thought process. As someone who often thinks about the market in terms of racetracks and poker hands, how can I not admire a man who once said. "You're looking for a mispriced gamble. That's what investing is. And you have to know enough to know whether the gamble is mispriced. That's value investing."
Pabrai apparently asked Munger if he would take the "buy and hold forever" approach if he were running a smaller pool of capital. According to Pabrai, Munger said that he'd do it like he did when he ran his partnership: Buy at a discount, sell at full price and then go back. With the present situation, he said that it makes no sense to do that.
What makes that so interesting and valuable a statement in my eyes is that it mirrors something Buffett speaking to a group of students back in 2012. He told the audience in response a question that if he were running a smaller pool of money, he would use a more Graham-type investing style with cheap stocks so he could earn a much higher rate of return. He told the kids that when you have smaller amounts of money, you can consider way more opportunities.
I find it very interesting that so many people are running around trying to emulate Buffett and Munger. Most of us do not have the problem of having to work with sums of $40 billion or more. Therefore, we would do far better to look at those types of stocks favored by Ben Graham. Those are the types that Warren and Charlie used to make their first few hundred million or so. By their own admission, they take their current approach to the markets because they have to think bigger with that much cash. Both admit that with smaller sums of money, they would be buying deeply undervalued securities and selling them at fair value.
While I cannot say with any degree of certainty what type of stocks Munger and Buffett would be considering if they were managing smaller sums of money, I suspect their list would look a lot like my deep value list. While green energy may be politically correct, I suspect both of them understand that dirty fuels, including coal, oil and natural gas, are going to be with us for many years to come. Stocks in those industries are cheap, based on asset value and future earnings power. Companies such as Rowan (RDC), Coeur Mines (CDE) and Swift Energy (SFY) all trade at steep discounts to book value and have the potential for long-term, outsized returns.
In his talk to the students, Buffett specifically mentions Graham's style of net current asset stocks. While there are not many available right now, there are a handful that I suspect both men would be buying if they were running small funds today. Trans World Entertainment (TWMC) and Richardson Electronics (RELL) and a handful of microcap issues trade below its measurement of liquidating value and would seem to have the potential for decent returns from current levels.
I also believe that both men would be holding a larger-than-normal measure of cash right now due to the very limited number of opportunities -- even with the wider universe available to small investors. If you follow Berkshire Hathaway you will not that the company is, in fact, holding onto a huge pile of cash. It has been engaging in more financing deals (such as Burger King (BKW)), than in stock buying activities. Munger in particular has not been shy about holding cash when he sees nothing much to do. He once said, "It takes character to sit there with all that cash and do nothing. I didn't get to where I am by going after mediocre opportunities."
So, unless you have the same size portfolio as Munger or Buffett, quit trying to do what they do today. Go back and look at how they built their fortunes. Use the size advantage that you have over investors to help you get back to buying cheap stocks and selling them when they reach full value.