Collection: Mohnish Pabrai - #32 'What Causes The Most Common Investment Failure?'



[Transcript]

MOHNISH PABRAI 00:07

Yeah, I mean, I think you know when I made the checklist.


The biggest number of questions on the checklist relate leverage and which means that the most failures that most people have in their investments was because something went wrong with leverage.


And so I think that in general, I think you need to pay a lot of attention to how businesses are finance and how conservative they are on that financing.


And so I think that in my case, what would happen is that the checklist would throw up all sort of red flags in the case of a business that's highly levered. So you know, what matter is you know, with leverage is that recourse and non-recourse, is it at the plant level or corporate level?


You know, how stable are the cash flows versus the leverage? What kind of multiples do you have on those cash flow versus your interest payment and all that.


So all those things I think matters, I think being a good credit analyst is a huge advantage. So yes I mean, I think you need to pay attention and ideally you want to look for businesses which generally large cash flows with virtually no leverage.


(Source: https://youtu.be/ot6pzc9ZwfU)

 

[YAPSS Takeaway]

1. Questions to ask yourself before investing in a stock

a. Is the company highly leverage.

b. Is the debt recourse or non-recourse? Is it at the plant level or corporate level?

c. How stable are the cash flows versus leverage?

d. What are the multiples on cash flow versus the interest payment?


2. Ideally, look for businesses with large cash flows with almost no leverage.