Mohnish Pabrai (Trades, Portfolio) is a legendary value investor and the founder of Pabrai Funds. He has followed the teachings of Warren Buffett (Trades, Portfolio) closely and focuses on investing in value assets with growth potential.
In a 2023 interview with Sum Zero, Pabrai discussed his contrarian investments in Turkey as well as revealed some insight into Charlie Munger (Trades, Portfolio). Let’s dive in.
Is investing in Turkey risky?
Turkey is strategically located as a gateway to both Europe and the Middle East. It has the 19th-largest economy in the world at approximately $819 billion. However, the country has experiencing galloping inflation of over 80% in 2022 and approximately 50% as of 2023. To put things into perspective, the U.S reported a 40-year high inflation rate of 9.1% in June of last year, which acted as a catalyst for the Federal Reserve to hike interest rates.
The high inflation rate in Turkey has caused the local currency, the lira, to devalue. In addition, a report by Foreign Policy indicates Turkey’s government shows “cracks” and potential political instability.
Either way Pabrai makes a great point that, relative to the U.S., the stock valuations are cheaper. In order to be a great investor, it often takes contrarian bets. If an opportunity is seemingly “safe” and obvious, it would likely become overvalued. Therefore, Pabrai said he prefers to fish where others are not fishing as there will “always be hair” on great investments. He believes a “weighting” should be given to the economic risk of Turkey, but this should be part of a bottom-up business analysis.
Value investments in Turkey
Pabrai has historically invested in three stocks in Turkey, according to his interviews. His first is Coca-Cola Icecek (IST:CCOLA, Financial), a Coca-Cola bottling plant that supplies products to Turkey and 12 emerging countries such as Pakistan and Iran. According to the guru, the company operates with a similar business model as other Coca-Cola bottling plants around the world. However, it trades at a lower valuation.
In terms of governance, Pabrai said the Coca-Cola Co. (KO, Financial), headquartered in Atlanta, owns 20% of the Turkish bottling plant and “sits on the board.”
In addition, Pabrai has met the “great management” of the bottling plant to verify its credentials. The chief financial officer used to work in Atlanta for Coca-Cola and, therefore, is internationally versed.
The second stock Pabrai owns in Turkey is called Reysas Lojistik (IST:RYSAS, Financial), a warehousing and transportation company. When he first entered the stock a few years ago, he invested just $7 million for approximately one-third of the entire company at a $20 million market capitalization. Since that point, the stock has increased in price substantially (by over 10 times) and trades at a $250 million to $300 million market capitalization. Despite this, Pabrai said he believes its liquidation value has also jumped from $700 million to over $1.5 billion. So it is not as cheap as it was, but still undervalued relative to liquidation value.
In terms of management, the guru praised the father and son team, who are “creatively” reinvesting with a 25% internal rate of return target, which is fantastic. As a result, Pabrai said he may “let this ride” for 20 or 30 years, despite the position size in his fund.
These two stocks are also inflation-protected as the capital expenditure is already done for the warehouses that Resays owns and its rents are inflation-indexed. On the other hand, the Coca-Cola Icecek can raise its prices with inflation.
The third stock, or “wonderful business,” is Tav Airports (IST:TAVHL, Financial), which has 15 airports in eight countries. Generally, Pabrai noted airports use a BOT (build, operate, transfer) model, with portions of revenue regulated, such as passenger revenue, and portions not regulated, such as duty free, etc. With Tav specifically, the company acquired an airport in Almaty Kazakhstan during the lockdown of 2020. This was an “outright” purchase and they own it permanently. This is a rare occurrence in the airport industry, according to Pabrai, as they are usually purchased on leases. The airport cost the company about $400 million, with $200 million extra invested into capital expenditures for a new terminal. However, it has cash flowing over $200 million per year with a forecasted 5% to 7% increase each year. Basically, this was purchased for three times cash flow. The management team is also high quality, according to Pabrai.
Munger’s biggest mistake
The investors also commented on what he called Charlie Munger (Trades, Portfolio)'s “biggest mistake”, which was an investment he did not load up on enough. Back in 1977, Munger received a phone call from a broker offering him 300 shares at $150 each from Belridge Oil, which was a large oil field in Bakersfield, California. Munger knew it was trading at between 10% and 12% of liquidation value, and thus was “really cheap.”
Two days later, the broker offered another 1,200 shares at the same price. The second time, Munger did not have the cash on hand and would need to sell another position to free up funds, so he decided to pass.
When Munger bought his first stake, the company traded at a market cap of roughly $155 million. Two years later, it was acquired by Shell Oil for $3.6 billion, which was over a 30 times return.
This turned his investment into around $1 million, which he invested into Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) at about $300 per share, which is now close to $500,000 per share. According to Pabrai, this was around a 166,567% return, which was incredible and resulted in a $1.67 billion total.
Munger reportedly says Belridge was his biggest mistake as he did not purchase more shares, which he knew were deeply undervalued. The extra investment, if then invested into Berkshire, would have resulted in an extra $6 billion, which is astonishing.
Part of the reason Munger did not invest, according to Pabrai, was that the CEO was an alcoholic. However, Munger “overweighted” this factor as the oil field “didn’t drink.”
Investing in China
The discussion then turned to his investments in China. Pabrai said he sold his position in Alibaba (BABA_ at a tax loss in order to switch it to Tencent (HKSE:007700). He added that he invested in Tencent indirectly via Prosus (XAMS:PRX, Financial), a technology holding company based in the Netherlands that has an extensive and established stake in Tencent.
Final thoughts
Pabrai is an independent thinker and great storyteller. His unique insights inspired by Buffett and Munger are valuable. The importance of being a contrarian and investing internationally should not be overlooked.
