Wall Street — especially the hedge fund set — suddenly loves Donald Trump.
In conversations both private and on the record, hedge fund managers — many of whom were skeptical of the brash real estate magnate and reality show star — have come around to the president-elect in a big way. (A big stock market rally goes a long way to seal this kind of affection.)
The latest example of a hedge fund manager who did not vote for Trump but now is gushing with ebullience over him is Mohnish Pabrai, the head of Irvine, California–based Pabrai Investment Funds. In a phone interview with Alpha, the value investor proclaims, “He may go down as one of the best presidents we’ve ever had.”
Well, that was fast.
“I did not work for the Donald, wasn’t a fan of candidate Trump,” says Pabrai, a self-styled Warren Buffett disciple known for taking very concentrated positions in a small group of stocks in which he has strong conviction. “Candidate Trump and president-elect Trump are two different people. On the campaign trail, red meat was delivered to the masses.”
But Pabrai is now a huge fan of president-elect Trump. Pabrai likes Trump’s private sector roots, despite his blatantly anti–free market protectionism proposals.
“For a very long time in the U.S., we had leaders who never ran a lemonade stand,” Pabrai explains. “You get important lessons from running a lemonade stand. The incoming administration has a lot of experience running stands. So that is really good.”
Pabrai is also happy with a number of Trump’s cabinet appointments. He singles out Exxon Mobil Corp. chief executive officer Rex Tillerson, Trump’s choice for secretary of state. “He’s a very talented leader, worked on a global stage, knows a lot of the players,” Pabrai proclaims. “He has run a lemonade stand.”
Of course, Tillerson has overseen deals in many contentious areas of the world, where politics will play a big role over the next few years — including Russia, where the appointee now famously received an award. Tillerson reportedly told students at the University of Texas in February, “I have a very close relationship with [Putin],” though he added that does not agree with everything Putin is doing.
Pabrai also likes the nomination of Montana representative Ryan Zinke to head up the Department of the Interior, whom he expects to embrace free market principles. “He is a guy now controlling 500 million acres of federal land and believes in ‘drill, baby, drill,’” enthuses Pabrai. Obviously, this will not go over well with environmentalists.
Pabrai — apparently no nvironmentalist himself — also is excited at the prospect of the Environmental Protection Agency being defanged. He’s also encouraged about Trump’s recent meeting with technology leaders, noting they found Trump sensitive to their needs to loosen the immigration rules for educated foreign workers.
Pabrai even supports a Trump campaign promise to scrap the favorable tax rate for carried interest, even though his personal taxes would increase. “It is the correct thing to do,” Pabrai insists. “It is unfair the way it is set up.”
Don’t misunderstand Pabrai, however. He is not a macro manager and actually urges investors not to make investment decisions based on economic policy or related pronouncements, explaining, “They will burn themselves. It is hard enough to understand a company’s business. You don’t want to go beyond that.”
For example, Pabrai says he spent a lot of time trying to understand the businesses of Fiat and General Motors Co. — his two largest positions — mindful that they benefit from a strong economy to sell cars. But when it comes to buying stocks, Pabrai says, “Micro factors in business always trump macro factors outside the business.”
As we earlier reported, three of Pabrai’s hedge funds were down between 5.5 percent and 9 percent in the first three quarters of the year. They were down somewhere in the midteens last year and have declined by more than 34 percent from mid-2014 through mid-2016.
However, the three hedge funds surged between 14.4 percent and 15.8 percent in the third quarter, according to the firm’s third-quarter client letter, obtained earlier by Alpha.
“With the substantial discount to underlying intrinsic value, I believe our portfolio is like a tightly coiled spring,” Pabrai, who owns just eight issues, told investors in the letter.
Sure enough, this quarter Fiat is up more than 37 percent; the GM warrants are up 33 percent; and Ferrari, another major holding, is up more than 12 percent, thanks in part to the post-election rally.
Pabrai is mindful that several of Trump’s proposed initiatives, including a big Democratic-style stimulus plan, can boost several of his stocks. His two largest positions would benefit from the economic recovery being extended beyond its current eight years. They also both make trucks, which would benefit from Trump’s stimulus plan.
Muses Pabrai, “Why do you think I love him so much?”