Platinum Asset Management’s buy back won’t protect it from short sellers

Terry McCrann wrote an amusing article in the Herald Sun on 14 September which likened Kerr Neilson and his planned buy back of up to 10% of Platinum’s shares (PTM.AX) to the sort of move the great Kerry Packer would have undertaken.

Earlier in the week Platinum made a completely vague announcement to the ASX that it intended to buy back up to 10% of its shares if it believed they were undervalued! 

This announcement was made largely in response to Morphic Asset Management and other short sellers who were pushing Platinum’s share price downwards and much closer to its true value (in the parlance of the industry it’s termed “price discovery”).

But was it a smart move by Platinum? I think not. The only real way that Kerr Neilson can dissuade the short sellers from his company is by performing well. Short sellers (like wolves) are attuned to the weaknesses inherent in their prey, and in Platinum they have found plenty of these weaknesses that they can potentially profit from.

Platinum’s announcement of a buy-back initially saw the share price rise quite a bit, but within 24 hours the share price once again tanked. Terry McCrann wrote his article far too soon. The irony being of course that the temporary spike in price was another opportunity for more short sellers to pile into Platinum.

Worse still, the publicity that Kerr Neilson gave Platinum by announcing this buy back is actually likely to attract more short sellers to Platinum, because it smacks of a rather desperate move on Platinum’s part, focusing further attention on both the flaws in Platinum’s model and its poor performance. Trust me when I say that these things cannot be overcome by a 10% buy back.

The actual announcement by Platinum was almost a joke. There was no price mentioned for the buy back and it was also immediately pointed out that Platinum doesn’t have enough cash to buy back 10% of its shares (borrowing money to buy back these shares would be insane).

It’s actually an indictment on the ASX and ASIC that they allow such announcements to be made. How is a company allowed to make an “announcement” that they may (or may not) buy back their shares at a secret price? That’s crazy. It’s yet another example of the nonsense our regulators allow.

I should state that I have no position in Platinum (either short or long) and as such am just an interested onlooker.

Mohnish Pabrai is still performing badly

A comment was made recently on this site asking how Mohnish Pabrai of Pabrai Investment Funds was doing.

The answer is, he is still grossly underperforming the S&P 500. As Mohnish himself stated in his annual letter to investors for 2015 (page 6):

“All three funds were down 15-19% for the year, while the bench mark indices were in positive territory.”

A comparison of Pabrai’s Investment Fund 2 (PIF 2)* with the S&P 500, using the figures published by Pabrai himself (on page 3 of his 2015 letter) shows that from 1 July 2008 to 31 December 2015, this fund had returned 1.63% compound per annum against the S&P 500’s 6.55%. 

In other words, $100,000 invested in PIF 2 on 1 July 2008 was worth $112,910 on

31 December 2015. If you had instead invested in the S&P 500, your $100,000 would have been worth $160,950 (using Pabrai’s figures).

It’s quite clear to me that Pabrai’s early performances (pre-GFC) were hugely assisted by the raging bull market that was then in place. Post GFC, Pabrai has struggled, he has not even been able to get anywhere close to the S&P 500.

As I’ve said on this site before, people using investing techniques espoused by Warren Buffett who do not have his incredible analytical abilities will fail – guaranteed. 

One of the primary reasons for this is the emulation of Berkshire Hathaway’s concentrated portfolio (although it’s not that concentrated these days). If you concentrate a portfolio and you are wrong in your assessment, you will pay a high price.

Back in 2009 when I noticed Pabrai buying into mining companies, I made the following observation on this site:

“I also wonder what skills Pabrai brings to the valuation of iron ore mines, zinc miners, molybdenum producers and the like? How does he know he’s buying them at low cost? Valuing these types of assets requires very specialist knowledge and skills and I’m not convinced that someone with no background in the industry has those skills.”

During 2015, Pabrai lost over $95 million in one company – Horsehead Holdings, a zinc producer. For Pabrai Investment Funds, $95 million is a very significant amount of funds under management.

Australians have a particular wariness of zinc producers as we have had some spectacular collapses of zinc companies – and believe me, we know mining! I too observed what looked like some very cheap zinc producers back in 2008-09, but knowing what I know, I didn’t touch them. It’s just as well, it all ended in tears.

Whenever you invest your money, you should think of the stock market as being very much like a pro golfer. A decent amateur may genuinely believe that they can beat the pro and they may even beat him or her on a few early holes, but over the journey of 18 holes, there is no way they will beat the pro and the longer the game goes on, the more this will become apparent.

* I could have selected any of his funds, this one wasn’t selected because it performed any worse than the other funds.