Why This Buffett Disciple Put More Than Half His Portfolio In Stocks He 'Always Hated'

Much was made about Warren Buffett's recent investment in airline stocks, despite his longstanding position that the entire industry is a bad investment.

But when it comes to making investments that appear to go against longheld beliefs, one legendary investor actually beat Buffett to the punch—Mohnish Pabrai.

Autos

In 2012, the Managing Partner of Pabrai Funds and CEO of Dhandho Funds began investing in automakers, despite having gone on record for years as hating the industry.

“Historically, the auto business has been a terrible business because it has very high [capital expenditure], it has unions, your field is subject to consumer pace—which you may or may not hit the market right on—and you've got to commit huge amounts of capital four or five years before the product comes out,” Pabrai told Benzinga’s PreMarket Prep. “And these are all far from ideal characteristics of a business.”

What Changed?

The short answer is the restructuring after the government’s auto bailout in 2009. Pabrai, himself a disciple of Buffett’s investing philosophy, began accumulating a position in Fiat Chrysler Automobiles FCAU in 2012.

“They got to shed a lot of the ugliness that was in the old General Motors Company GM and the old Chrysler,” Pabrai said. “They got rid of their healthcare liabilities, they got rid of their debt, they got rid of a lot of the dealers...they were able to do a number of things that would have been impossible for them to do had they not gone through bankruptcy.”

Significant Shift

Despite the monumental changes initiated by GM and Chrysler during the bankruptcy, investor sentiment and a lingering bias against the sector have kept their prices low. Pabrai, recognizing a fundamental shift in business practice, seized on their value.

“The business changed in a very significant way, just like the airline business changed in a very significant way,” Pabrai said, comparing his position with the automakers to Buffett’s stake in several major airliners. “Those changes were not recognized by the market because they always thought the airlines are a bad business and autos are a bad business.”

Between his stakes in Fiat-Chrysler, Ferrari (RACE) and GM, car manufacturers now make up over half of his investment portfolio.

“So far, we have a 400 percent return in about four and a half years in the ‘lousy auto business,’” Pabri said. “We have not sold, we have no intention of selling, and I think that by the time the dust settles we may have 1,000 percent return on investment.”

Listen to the full interview with Pabrai in the clip below.

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Image courtesy of Dhando Funds