Mohnish Pabrai: Three Great Books to Read

Mohnish Pabrai visited Talks at Google on June 5, 2017. At the end of this talk Mohnish recommended three books.

  1. The Beak of the Finch: A Story of Evolution in Our Time, Jonathan Weiner
  2. Am I Being Too Subtle?: Straight Talk From a Business Rebel, Sam Zell
  3. Damn Right: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger, Janet Lowe

Disclosure: I am not receiving any compensation for any of the links provided. I have no business relationship with any company or individual mentioned in this article. I have no position in any stock mentioned. 

Pabrai’s Dhandho Checklist: Seven Questions to Ask Before Buying

“Good checklists, on the other hand are precise. They are efficient, to the point, and easy to use even in the most difficult situations. They do not try to spell out everything–a checklist cannot fly a plane. Instead, they provide reminders of only the most critical and important steps–the ones that even the highly skilled professional using them could miss. Good checklists are, above all, practical.” ―Atul Gawande, The Checklist Manifesto: How to Get Things Right

The Dhandho Investor: The Low-Risk Value Method to High Returns, written by Mohnish Pabrai, was released in 2007. Over at Amazon the book is described as “A comprehensive value investing framework for the individual investor. In a straightforward and accessible manner, The Dhandho Investor lays out the powerful framework of value investing.” I read the book back when it was released, and it’s a decent book.

But anyways, except for that, I scrolled though the book yesterday, and in the end Pabrai sums up a few questions for the investor to ask before consider buying into a business. These seven questions could be compared to Warren Buffett’s own four checklist questions that he wrote about in his 1977 letter to shareholders―see end of post.

TDI1TO ENTER OR NOT TO ENTER—THAT IS THE QUESTION

Much of this book has fixated on the various nuances of buying stocks. This is by no means a summary, but here are seven questions that an investor ought to be thinking about before entering any stock market chakravyuh:

1. Is it a business I understand very well—squarely within my circle of competence?

2. Do I know the intrinsic value of the business today and, with a high degree of confidence, how it is likely to change over the next few years?

3. Is the business priced at a large discount to its intrinsic value today and in two to three years? Over 50 percent?

4. Would I be willing to invest a large part of my net worth into this business?

5. Is the downside minimal?

6. Does the business have a moat?

7. Is it run by able and honest managers?

One should only consider buying if the answer to all seven is a resounding yes. If a well-understood business is offered to you at half or less than its underlying intrinsic value two to three years from now, with minimal downside risk, take it. If not, take a pass on entering this chakravyuh. There will be better chances in the future.

In essence, the questions above from Pabrai’s book are pretty much another way of saying the same thing as Warren Buffett did back in 1977 in his letter to shareholders:

“We select our marketable equity securities in much the same way we would evaluate a business for acquisition in its entirety. We want the business to be (1) one that we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive price. We ordinarily make no attempt to buy equities for anticipated favorable stock price behavior in the short term.  In fact, if their business experience continues to satisfy us, we welcome lower market prices of stocks we own as an opportunity to acquire even more of a good thing at a better price.”

As Pabrai, you should keep learning from the ones before you that you look up to as role modes. Bring to you all their wisdom and thinking that’s worth carrying on your own journey. Be it about life itself, value investing or any other endeavor. The most important thing is to never stop learning.

“A man may die, nations may rise and fall, but an idea lives on. Ideas have endurance without death.” ―John F. Kennedy

Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company or individual mentioned in this article. I have no positions in any stocks mentioned.

Mohnish Pabrai, Guy Spier & Michael Shearn on Investment Checklists

Let’s start with a few words from Mohnish Pabrai on the use of an investment checklist from the Value Conferences session (see links below).

“For example, typically when I run the checklist the first time when I’m looking at an investment — it’s actually the last thing I do before making an investment — it usually takes no more than 15-20 minutes, maybe 30 minutes max to run it, but the first time I run it, it actually pops up all sorts of questions to which I don’t know the answer. That’s like been the biggest value addition, which is there are these blind spots that I have completely ignored. Then I go back and research the business some more to get answers to those questions and sometimes that can take a week or longer. Then I rerun a second time. Now the second time when I rerun it, we’ve got all the questions answered and we can see the failure or possible failure points.”

—Mohnish Pabrai

Go here for full transcript of the session.

See here for original post at Value Conferences.

Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company or individual mentioned in this article. I have no positions in any stocks mentioned.

Forbes Transcript: Mohnish Pabrai on Checklists

“No wise pilot, no matter how great his talent and experience, fails to use his checklist.”—Charlie Munger, Poor Charlie’s Almanack

“So you know, and all of these questions are not questions I created out of the blue. What I did is I looked at businesses where people had lost money.”—Mohnish Pabrai

Steve Forbes Interview With Mohnish Pabrai

A few years back, in 2010, Steve Forbes interviewed Mohnish Pabrai. This interview is about half an hour long, and among the topics discussed, checklists was one of them. The interview is available on YouTube, and there’s also a transcript available at Forbes’ – see here.

Below is an excerpt of the part of the discussion where Steve and Mohnish talk about checklists. Emphasis added by me.

“Make Checklists

Forbes: So in the first quarter of 2010, did you add any positions?

Pabrai: Yeah, actually, we did. We did find. In fact, there’s one I’m buying right now. But I found two businesses, but they’re anomalies. They were just, you know, businesses that had distress in them because of specific factors. And I think we’ll do very well on both of them. They’ll go nameless here. But no, I think, for example, in the fourth quarter of 2008 or the first quarter of 2009, you could have just thrown darts and done well. And that is definitely not the case today.

Forbes: And finally, telling you about mistakes, one of the things I guess an investor has to realize, they cannot control the universe. Delta Financial: You had done the homework, you fell and then events took it away from you.

FI1Pabrai: Well Delta Financial was a full loss for the firm, for the fund. We lost 100% of our investment. It was a company that went bankrupt. And we’ve learned a lot of lessons from Delta. And one of the lessons was that Delta was, in many ways, a very highly levered company and they were very dependent on a functioning securitization market. And when that market shut down, they were pretty much out of business. And they were caught flat-footed. And so there’s a number of lessons I’ve obviously learned from Delta.

It’s easier to learn the lessons when you don’t take the hits in your own portfolio. But when you take the hits in your own portfolio, those lessons stay with you for a long time.

Forbes: So that gets to, you’re a great fan of The Checklist Manifesto. And you now have checklists. You said one of the key things is mistakes, in terms of a checklist, so you don’t let your emotions get in the way of analyzing. What are some of the mistakes on your checklist now that you go through systematically, even if your gut says, ‘This is great. I want to do it.’

Pabrai: Yeah, so the checklist I have currently has about 80 items on it. And even though 80 sounds like a lot, it doesn’t take a long time.

It takes about 30 minutes to go through the checklist. What I do is when I’m starting a business, I go through my normal process of analyzing the business. When I’m fully done and I’m ready to pull the trigger, that’s when I take the business to the checklist. And I run it against the 80 items. And what happens the first time when I run it, there might be seven or eight questions that I don’t know the answer to, which is great, which what that means is, ‘Listen dummy, go find out the answer to these eight questions first.’ Which means I have more work to do. So I go off again to find those answers. When I have those answers, I come back and run the checklist again. And any business that I look at is going to have some items on which the checklist raises red flags. But the good news is that you’re looking in front of you with all your facilities at the range of things that could possibly cause a problem.

And when you look at that list, you can also compare it to how those factors correlate with the rest of your portfolio. And at that point, kind of, you have a go, no-go point, where you can say, ‘I’m comfortable with these risk factors here. I’m comfortable with probabilities. And I’ll go ahead with it.’ Or you can say, ‘I’m just going to take a pass.’

And one of the things that came out of running the checklist was I used to run a 10×10 portfolio, which is when I’d make a bet, it was typically 10% of assets. And after I incorporated the checklist and I started to see all the red flags, I changed my allocation. So the typical allocation now at Pabrai Funds is 5%. And we’ll go as low as 2%, if we are doing a basket bet.

And once in a blue moon, we’ll go up to 10%. In fact I haven’t done a 10% investment in a long time. And so the portfolio has become more names than it used to have. But since we started running the checklists, which is about 18 months ago, so far it’s a zero error rate. And in the last 18 months, it’s probably been the most prolific period of making investments for Pabrai Funds. We made a huge number of investments, more than any other period, any other 18-month period in our history. So with more activity so far, and it’s a very short period, we have a much lower error rate.

I know in the future we will make errors. But I know those errors, the rate of errors will be much lower. And this is key. The thing is that Warren says, ‘Rule No. 1: Don’t lose money. Rule No. 2: Don’t forget rule No. 1.’ OK, so the key to investing is downside protection. The upsides will take care of themselves. But you have to make sure that your losers are few and far between. And the checklist is very central to that.

Forbes: Can you give a couple of the things that are on your 80 [item] checklist?

C2Pabrai: Oh yeah, sure. The checklist was created, looking at my mistakes and other investors’ mistakes. So for example, there’s questions like, you know, ‘Can this business be decimated by low-cost competition from China or other low-cost countries?’ That’s a checklist question. Another question is, ‘Is this a win-win business for the entire ecosystem?’ So for example, if there’s some company doing, you know, high-interest credit cards and they make a lot of money, that’s not exactly, you know, helping society. So you might pass on that. Also, a liquor company or tobacco company, those can be great businesses, but in my book, I would just pass on those. Or a gambling business, and so on.

C2So the checklist will kind of focus you more toward playing center court rather than going to the edge of the court. And there’s a whole set of questions on leverage. For example, you know, how much leverage? What are the covenants? Is it recourse or non-recourse? There’s a whole bunch of questions on management, on management comp, on the interests of management. You know, just a whole–on their historical track records and so on. So there’s questions on unions, on collective bargaining.

C2So you know, and all of these questions are not questions I created out of the blue. What I did is I looked at businesses where people had lost money. I looked at Dexter Shoes, where Warren Buffett lost money. And he lost it to low-cost Chinese competition. So that led to the question. And I looked at CORT Furniture, which was a Charlie Munger investment. And that was an investment made at the peak of the dot-com boom, where they were doing a lot of office furniture rentals. And the question was, ‘Are you looking at normalized earnings or are you looking at boom earnings?’ And so that question came from there. So the checklist questions, I think, are very robust, because they’re based on real-world arrows people have taken in the back.”

OLYMPUS DIGITAL CAMERADisclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company or individual mentioned in this article. I have no positions in any stocks mentioned.

Mohnish Pabrai’s Google Talk: “Dhandho. Heads I win; Tails I don’t lose much”

Explain Why it Makes Sense

“The most important thing is that, before you invest, you should be able to explain the thesis without a spreadsheet within four or five sentences. Typically I write down those sentences before I invest, so if I have a conversation with someone you could very quickly explain why this investment makes sense.” —Mohnish Pabrai, Google Talk July 21, 2014

Patience is the Single Most Important Skill

“Good traits, or important traits for being a good investor, number one the single most important skill is patience. So I think the thing is that markets have kind of a way of deceiving us, because you know when you turn on CNBC and you see all those flashing red and green lights and all that, its inducing the brain to think that you need to act now, and you need to act immediately. Nothing could be further from the truth.  You know Buffett always talks about having this punch card where in a lifetime you make twenty punches, and each time you buy a stock you punch it once so in a lifetime you’d make twenty investment decisions. Which means that if you started investing at twenty and ended at eighty, every three years on average you’d make one investment. And that is very hard for most people to do. And so, the more you can slow down your investing, and the more patient you can be, so the issue is that the time scales of which companies go through change and such, is very different from the time scales of which the stock market operates. So you really have to focus not so much on the stock market and have a lot more focus on the nature of change in businesses and be willing to be in there for a while.” —Mohnish Pabrai, Google Talk July 21, 2014


Mohnish Pabrai – Background

Pabrai worked with Tellabs between 1986–91, first in its high speed data networking group, and then in 1989, joined its international subsidiary, working in international marketing and sales.

In 1991 he started his IT consulting and systems integration company, TransTech, Inc. with about US$30,000 from his own 401K account and US$70,000 from credit card debt. He sold the company in 2000 to Kurt Salmon Associates for US$20 million. Today he is the managing partner of the Pabrai Investment Funds (a family of hedge funds inspired by Buffett Partnerships), which he founded in 1999. (Source: Wikipedia)

The Dhandho Investor: The Low-Risk Value Method to High Returns

The Google Talk, see video below, centers around the investment concepts discussed by Mohnish in his book the Dhandho Investor, that was published a few years back. Some of these concepts are, among others, the Dhandho concept of doing business, risk vs uncertainty, circle of competence and margin of safety.

Excerpt about the book from Amazon:

A comprehensive value investing framework for the individual investor

In a straightforward and accessible manner, The Dhandho Investor lays out the powerful framework of value investing. Written with the intelligent individual investor in mind, this comprehensive guide distills the Dhandho capital allocation framework of the business savvy Patels from India and presents how they can be applied successfully to the stock market. The Dhandho method expands on the groundbreaking principles of value investing expounded by Benjamin Graham, Warren Buffett, and Charlie Munger. Readers will be introduced to important value investing concepts such as “Heads, I win! Tails, I don’t lose that much!,” “Few Bets, Big Bets, Infrequent Bets,” Abhimanyu’s dilemma, and a detailed treatise on using the Kelly Formula to invest in undervalued stocks. Using a light, entertaining style, Pabrai lays out the Dhandho framework in an easy-to-use format. Any investor who adopts the framework is bound to improve on results and soundly beat the markets and most professionals.

Google Talk with Mohnish Pabrai

See video below for the brand new Google Talk (approximately 60 minutes) with Mohnish Pabrai from July 21, 2014. Enjoy.

Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company or individual mentioned in this article. This article is informational and is in my own personal opinion.