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Collection: Mohnish Pabrai - #33 'How to Create a Checklist For Investment'


Video Link: https://youtu.be/bSG8eb71Sps


In this episode, Mohnish Pabrai was asked what are some of the big buckets on his checklist?


In this episode, you’ll learn:

  • How Mohnish Pabrai creates his investment checklist?

  • Top 3 categories of Mohnish Pabrai's investment checklist.

To check out all Collection: Mohnish Pabrai <click here>

[Transcript]

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

MOHNISH PABRAI 00:07

Yeah, so actually just to take a step back on the checklist.


One of the things I did not want to do the checklist was to just blue sky think about things that are good to think about an investor when you're making an investment.


I did not want to create a checklist in that way. What I wanted to do with a checklist was to create it based on real losses that some great investors had because they missed something elementary.


And so every investor no matter how good they are, plenty of mistakes they're going to make. In fact, John Templeton says if you are right two out of three times in the investing business, you will hit the ball way, way, way, out the park. So the good news in this business is you can have a very healthy [Inaudible] rate and still do quite well. So that's one thing to keep in mind.


And so what I have done when we were creating the checklist was to look at permanent loss of capital that had occurred amongst investors that I had a great deal of respect for and then try to reverse-engineer why those losses might had occurred.


And the easiest one to do on that front were Buffett and Charlie Munger because they talk so much about their mistakes. And many other investors don't talk about their mistakes at all and some fall in the middle.


So in some cases, I had to kinda reverse-engineer what I thought – what I thought the mistake may have been. But in other cases like with Berkshire, you know, when I look at Dexter Shoes or USAir or them buying Berkshire Mills.


And all these different Investments they made or NetJets for example, the nature of the mistake was obvious and therefore coming up with the checklist question will be easy. Some of the other ones took a little bit more work, but we were able to get there.


You know, like before the financial crisis Longleaf Partners had invested in General Motors and they – Of course, eventually GM went bankrupt and of course, they lost a lot of money on that investment. And ironically now I'm invested in GM, but it's not your father's GM anymore.


So you know, we looked at – you know, I have an intern to help me do that. And so the checklist questions came out of real failures that I had in investment that had gone south of Pabrai Funds and other great investors had. So we ended up with a list of 90 odd questions.


So I wasn't particularly planning that the checklist should go in one direction or the other. It was really driven by the mistakes and what those questions were and then when I recategorize and I reordered the checklist by category, what surprises me is that how beautifully they fell into a few different category.


So there is a significant number of questions, I think more than 20+ questions, maybe 25 questions which relate to various types of leverage and failures relate to leverage things.


Then there is another section that relates to moats and comparative advantage, you know shrinking moats or non-existent moats or you know, mistakes made in thinking about the moat and such. There's lot of questions around that, you know, like Dexter Shoes in Berkshire's case was Warren made a mistake about that moat.


Then there's another section that is on management and ownership, you know, what percent of the company's management owned? How they're compensated? How align are their interests? So all these questions related to management and ownership.


And then we get to, you know, some miscellaneous areas like, you know, unions, organized labor, environmental issues and things like that. But the top 3 of all category basically, took up most of those questions.


And those are the most important thing you would think about, you know, you would think about leverage. You definitely would spend a lot of time thinking about moat and competitive advantage. And you definitely want to spend a lot of time thinking about the folks who are running the show and, you know, what types of people in history and such that they had.


And so, to me it was surprising how the most of the mistakes in those areas.

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