 Good day, fellow investors! We are more than a month from the last day of the fourth quarter of 2017, which means that the greatest investors that are managing big hedge funds, other investment funds, have to report their US positions to the SEC. This means that we can see what they own, but also what they traded during the previous quarter. Things might have changed in the last month and a half, but nevertheless it's always interesting to learn what are they doing and what they have been doing, what they have been trading and what are their positions, and we might find something interesting for us. Today we're going to discuss what Monish Parbaid did in the last quarter and Seth Klarman. There are some very very interesting lessons about valuations and cash portfolio rebalancing and we're going to discuss stocks like Fiat Chrysler, Allergan and other stocks that these guys own. Monish Pabrai, US investor but coming from India, famous for his book The Dando Investor, The Low Risk Method to High Returns. Low risk, high returns, my viewers know that it was as my background for a while until we passed to the green screen. Very interesting book, more like a story read, but describes the best concepts for long-term investors and how to really accumulate wealth over time and on what to focus. Interesting read, very fun read, I would recommend it always. I would recommend most books, but that's another story. Now according to some news interviews mostly from Pabrai, his US portfolio is now lower than 30% of his total portfolio. He's mostly focused on Asia and he has been saying that he can't find good investments in the US. And when you go deeper, he usually had 70% in US stocks, now he's only 30%. So that's also one sign for those who are focused on the US market. When you go deeper into it, you will see that his 30% portfolio is focused on five stocks and that 30% or less than 30% is focused on one stock. His top holding is Fiat Chrysler. Now if you look at the chart of Fiat Chrysler in the last few years, the stock price was below 10 and is now at 22. I remember hearing Pabrai in some interview a few years ago saying how Fiat Chrysler will have earnings of $4 per share in 2018. Well, he was pretty right on that call. And his fair value about Fiat Chrysler is around 25, so he might have sold his stocks in 2018 in this quarter. Because in another interview, he is stating how the biggest risk to stocks, and this is very important to hear, are where will interest rates move in the next five years? So investors usually have a fixed perspective on the market. Big investors like Pabrai have dynamic perspective on the market. So he's not interested that much in current yields. Investors usually are. They see what's going on now and then compare it to others. Okay, stocks are still better. His interest rate in where will yield interest rates move in the next five years? If those go up, then the whole stock market will be pulled down eventually. We are not yet seeing that effect because people don't buy that much bonds because they expect bonds to go even lower as interest rates rise. But eventually this will turn it. It will be a very fast turn. So he's focused on that. He doesn't like the US market. Nevertheless, he holds Fiat Chrysler or he has been holding it. Perhaps he's sold everything as the stock reached his fair value assessment of 25 that was 30 in case of a takeover. However, you might say, okay, if Fiat Chrysler has earnings of $4 per share at a price of 25, that's a price to earnings ratio of six. And here is a big lesson for investors. Fiat Chrysler is a cyclical company. So if you look at the cycle, then it's the worst time to buy such a company is when the price earnings ratio is very low. So it might look cheap to investors, but at 25, entering the late part of the cycle, entering in the future soon to be recession, this is now the end of the line for Fiat Chrysler. And I expect Pabrai to be selling his position in the next 12 months. When it's cheap to buy such a stock is when the stock price is at five, when the price to earnings ratio is negative, where earnings are deeply in the red, but there are positive things going on, then the stock is cheap. So it might be counterintuitive, but such stocks are cheap when the earnings are negative and expensive when the earnings are extremely positive and the price earnings ratio are low. Sounds crazy, but this is something we can learn from Pabrai. He has been buying Fiat Chrysler at the stock price of seven. I think when we adjusted for the Ferrari spinoff, then it is below five. So he has been buying Fiat below five. And now he holds a huge return for bagger, five bagger, whatever at 25. So excellent investment strategy. He has been patient for a few years to wait and to see that value unlock. Now it's expensive, but perhaps there will be other opportunities in the future. Nevertheless, a great story. Second portfolio position for Pabrai is Google. The third one is RCAP. He has been selling Google. He has been started buying Google at below 500. Now he has sold more than 30% of his position in the fourth quarter. He has also sold more than 20% of RCAP. So he has been slowly selling. He has a lot of money in cash. I think I heard in an interview about 30-40% in cash now waiting for higher interest rates that will push down stock prices or at least create opportunities in the few stocks that he understands and keeps an eye on. So why is he selling just 30% of Google and not the whole company? Because I think he's focused on Google. He likes the company. There is still value, RCAP. We have been discussing the airline industry. There is still a lot of potential there. But by slowly trimming or selling some parts of his portfolio, he allows for volatility. If those fall, he will buy them again. So he is booking small returns that in the long term, those small returns by portfolio rebalancing lower the risk and increase your return. So it's always, as he says in his book, low risk for high returns. The higher the price, the higher the risk is. And he's constantly balancing that in his portfolio. Seth Klarman also 30-40% in cash. He has been distributing cash to investors in his Baupost 30 billion hedge fund. So he's also not finding such good ideas. But there is something that he is doing like Warren Buffett is doing with Monsanto, where it is expected that Monsanto is bought out by buyer. Seth Klarman also engages in merger arbitrage and he has opened the position in Time Warner that is expected to be acquired by AT&T. This will take time, as there are some lawsuits and things that are going on. But nevertheless, if the deal goes through, Klarman sits on a 23% return on investment when AT&T actually buys the company. Probably he thinks it's a good risk reward and he has engaged in merger arbitrage, because merger arbitrage will give you a shorter investing frame than a long term, which means that it's less risky and the reward is cash. And he likes cash at this moment, like Buffett is buying Monsanto, so merger arbitrage strategy. Very interesting for those who want to see what is the risk reward and who want to limit their long-term risks. So we don't want to be exposed to such long-term risks in the stock market, because nobody knows what will happen beyond 2018-19. Another position that's very interesting is Allergan. The position has been significantly increased last quarter as the stock kept falling. And what is important is that the same increase will probably be solved as soon as the stock crosses 200 again. As it was the case in the first quarter of 2017, when Klarman solved what he bought at lower levels, even if his entry point, first entry point, was much higher than that and closer to 300. So even Klarman, he is buying now more Allergan, he has been selling as the price goes up and down. So he's always balancing the risk in relation to the value a stock has. The broader is the margin of safety, the more he invests. But as soon as the margin of safety is smaller, even if there is a margin of safety and he thinks the actual value is higher because he started buying at 300, he sells a position to gain those small returns lower the risk and increase incrementally small, small part, the long-term return, which has been just below 20% for the past 40 years. So these guys really know what they are doing. Moral of the story, think about rebalancing the risks in relation to the cash in your portfolio and also when a stock is volatile. Constantly rebalancing will lower the risk and increase your returns by a few percentage points here and there, which accumulate a lot over time and lower what's most important, your risk. Secondly, Buffett, Pabrai, Klarman have a lot of cash now, 30-40% even Buffett has 109 billion in cash. Something to really, really think about even if everybody is excited about the markets. If they say have so much cash, that's something to really keep in mind. Everybody will say now yes, but they can't invest in small stocks, yes, but they can do that, yes, but they can do everything and they will go invest in a small stock if it gives them returns that they like. Buffett just invested in Teva, just a small position, so they do that. So it's not really true that they wouldn't invest in smaller stocks. So they keep cash because they think interest rates will be much, much lower. Thank you for watching. Looking forward to the comments and I'll see you in the next video.