I was watching the interview of Mohnish Pabrai on Forbes and was struck by the clear exposition and was struck by some of the things he said. He also reminded me of some of the great quotes from Munger and Buffett. I want to mention here a few.
You don’t make money when you buy a business or when you sell a business. You make money by waiting. – Munger
All man’s miseries derive from not being able to sit in a quite room alone. – Blaise Pascal
Mohnish has had a varied career. He started a company which worked and then he started one which failed. Pabrai funds is his third venture.
The first company took no capital and generated enormous amount of capital for me. Then I got fat dumb and happy and in the second company I put in a lot of capital … and I violated the low risk high uncertainty principle. The third business [the Pabrai funds] took no capital. There is no downside, it is low risk high uncertainty business.
He talks about what he looks for in a company. He first figures out how he can lose money on this equity. Can he minimize the downside ? Because the upside will take care of itself. He moves on to the importance of checklists.
It is very important to have a good checklist. Checklists force you to ask questions which are uncomfortable to your buy thesis. Most of us start looking at a company predisposed to either like it or hate it. Most often we look at an idea because we find them interesting. In this sense, we are predisposed to behavioural biases like Confirmation Bias, Survivorship Bias, Jumping-to-Conclusions etc.
A significant way in which our predisposition effect the result of the research is as follows. If we hate the company then we ask pointed questions and when they are answered in a positive way (opposite our preconception) we try to dig deeper to find the source of the anomaly. On the other hand, if we are predisposed toward liking the idea then we are satisfied by superficial agreements.
Some of the examples of questions on his checklists are.
Can this business be decimated by low cost competition from say China?
Is this a win-win business for the entire ecosystem ? Gambling, tobacco, high interest credit cards etc are pass.
Unions, collective bargaining.
Are you looking at normalised earnings or boom earnings ?
The last question was the reason why I passed on Caterpillar (CAT) a few months back when it was trading around $80.
Mohnish is also against talking to the CEOs. He says that CEOs are charismatic and great at sales. One cannot be a leader unless one is optimistic. One is better off not talking to the CEO but looking at what he has done.
All in all, a very enjoyable interview.