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Collection: Mohnish Pabrai - #169 'I Pick Stocks Like a Harsh Grader'



Hi Mohnish, my question it's really about how you assess when a business fundamentally goes from being temporarily challenged to structurally challenged or in sort of terminal decline?

If you look at the big consumer goods companies or much of retail. So how do you sort of assess that?


Well, I mean I think that — a couple of comments there.

One is that we have such a large choice, a large range of options when we’re making investments — I mean investments, I mean there are like 50,000 stocks globally — so I think one should be a harsh grader.

And there are no call strikes in this game, unlike baseball. And you can let a lot of balls go. So we can do very well without buying consumer packaged goods or buying retailers.

So if things bother you about — you know, a lot of things — so capitalism, by definition, is extremely brutal. Pretty much any company in existence today will not exist, maybe most of them will not exist even a couple of decades from now or maybe even less than that. So the demise of virtually every business is guaranteed.

So given that backdrop, I think what we as investors should do is we should be very harsh graders. And if we don’t have a crystal ball that tells us that a retailer is going to be in great shape 10 years from now or 15 years from now — then unless you’re getting it really cheap, and you know you’re only dependent on the next, let's say, two or three years of cash flow to cover what you’re paying, for example, and you have you know kind of strong conviction on that — you can take a pass, I mean there's entire industries you can take a pass on. It’s not a problem.

And I think you can also build plenty of wealth while just understanding one or two industries. So one doesn’t need to have a kind of Swiss Army knife approach to investing.

There are plenty – In fact, if you look at most entrepreneurs, they’ve created their wealth with an extremely narrow skillset that they’ve capitalized on. I mean, they know – I mean, they are basically an inch wide and a mile deep, and that’s a perfectly fine way to go. So better to be an inch wide and a mile deep than a, you know, mile wide and an inch deep.

And so specialization has a huge advantage. And you know if you’re questioning core structural aspects of industries, you know you can always take a pass and there’s no penalty for that.



[YAPSS Takeaway]

  • Be a harsh grader;

  • When you have doubt, just take a pass, there's no penalty in the game of investing.

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