Last year, 926 companies were removed from the New York Stock Exchange, the AMEX and the Nasdaq. They were added to the Private Stock Market.

 Does it sound familiar ? It should- these requirements are similiar to W.Buffett's. Buffett is competing with private equity companies.The question is why nobody wants companies that are in debt, bad shape and are cheap ? 

Now imagine this scenario: if market will go down like in 2000. All these private equity firms,Buffetts will start looking for bargains and what they will try to take private? You guessed it: real cash flow companies.

I'm suprised why nobody asked this question: How comes W.B. didn't fall into internet bubble,credit bubble,real estate bubble,technology trap?
Is it because he has a crystal ball or because he loves real cash flow ?

These PE companies and Buffetts are watching and waiting. So, if prices of shares will go down and companies will start making more than 15% cash flow .They will move big time either for cash or as leveraged buyouts.

If real companies have no debt,and steady cash flow then it should be much easier for investors to figure out how much are they worth.So they you should be rewarded much faster if they spot them soon.

I like this example: lets have a look at a company that have no debt,steady cash flow and returns 10% cash/share.

What will happen if the management will start buying the shares back ? What will happen if the management will lower the costs 2% and higher the prices 2%.

Ideally in 6 years time - there will be no stocks left ! Growth fans will not even consider buying this non growing stock:-)

Even for management its much easier to manage these companies.Have you ever heard about strategy of See's Candies ?

What wasn't in Mohnish Pabrai's book

I think Mohnish Pabrai has few mistakes in his strategy.

First, it is good to distinguish what will your strategy do in bull market and in bear market.

If you have bull market and you buy dips even from the chart you can see that it will be more profitable because dips will be at the end equal to non dips. (dip rose faster and higher than non dip )

If you have a bear market and you buy dips you will end up in the trap (dip will start falling faster than non dip). 

Now, let's have a look at Mohnish Pabrai's real picks you realise that he is playing games of turn arounds. If he is right he wins big time if he is wrong he loses badly.

In a bull market he will not have so many deadly picks and he will have big winners. In bear market it will be the opposite.

Why I'm talking about bull market and bear market ? When these are macro factors? Because turn-arounds are highly vulnerable to these macro facts. (they are higly in debt,they need financing etc. )

Now lets make the calculation that wasn't in Mohnish Pabrai's book. 

Portfolio manager will star with 1$ after 4 years time he will triple the money so his portfolio will be worth $3 then the last year will come the bear market and he will have 50% downturn. How much will be his portfolio worth?

$1.5

It means that if someone bought company that is growing steadily 10%a year.He will end up better off  his return would be 61% in comparison with Pabrai's 50%.

The other thing is usually turn arounds don't pay dividends because they are distressed. So if you held on the company for 5 years ,the dividend guy will be at least 12.5% ahead (2.5%*5).

Don'forget that even if you hold on the dividend paying company and you have paper loss - company still pays dividend and it is lowering your loss.This makes big difference in your portfolio result.

Mohnish Pabrai is big W.B. follower but did he try to answer this question:

Why W.B. doesn't play turn around ?