Collection: Mohnish Pabrai - #23 'Research Process'



Okay, so let me just try to make sure I understood the question. So you're saying that what do I do after I identify some stock through a 13-F? Okay, so the invest – the research process you're saying. Yeah, okay.

So basically the first question I ask myself is, you know, is this company within my circle of competence or not? That's the first question. And a lot of things are not within my circle of competence.

So typically, you know everytime I looked at Seth Klarman's 13-F. You know, the Baupost Fund. Basically, I see a lot of pharmaceutical companies on it and I have no idea. You know, what they're all about or why those companies are even on there? So, you know, they are quick passed.

So many many businesses are like that where I cannot understand much about them and such. So they're immediately excluded then you know, usually if a business I got some interests one of the first things I do is I look at the quick valuation metrics.

You know, in general the absolute lowest returns I'm looking for it needs to at least be 50% off intrinsic value so it needs to be at least half off. So there are many investors who will buy something for $13 if it's worth $18 or $19. And to me that's an automatic pass because if I'm buying something for $13, I should be convinced that if not immediately at least in next couple years it's worth at least mid 20s.

And so valuation usually are one of the foremost common reason for excluding something after circle of competence. Now if you get past the circle of competence or something is – things that I think I can understand and also something appears to be somewhat cheap then, you know, the process I used is designed to basically get to a 'No' as quickly as possible.

So I will spend about a minute or two looking at the businesses just looking at some metrics or quick data to try to see a clear cut reason to say no. If I don't get to that in the first couple minutes, then I'll give it another 15 minutes.

And I'll go through a little bit more data so I might open up the website of the business look at investor relations presentation or something. You know, try to understand what the company is saying its prospect are and so on so forth.

And see if at the end of that 10 minutes and 15 minutes exercise, if it can safely be passed on for some good reasons. And if I cannot get that point then the next step would be obviously be to start doing a little further drill down, you know, start printing of the annual reports, 10-Qs, 10-Ks and I might spend a few hours looking at the business again trying to understand why it would be good and smart to reject it.

And if I get past the next few hours, and it's still not rejected, then I'll start doing a more thorough drill down and that might take a few days and if it's still not rejected after that then you know, it will run the checklist see what kind of information that pops out.

Usually the checklist brings up things that I don't know about the business which is the biggest values it adds. And you know, that might lead to more research and such. So its the process of elimination and eventually, it will hopefully get to a point where kind of 7 ducks line up in a road, it looks like a good fit and you can pull the trigger.



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