pabrai checklist

7/27/2019 Pabrai Checklist

1/21


2/21

Munger & The Checklist

B-17 Bomber

www.pabraifunds.com


3/21

Too Much Plane for One Man to Fly

er e - cras , oe ng s surv va was n

question.

.

Too complex for one mans memoryFour c ec sts ta eo , g t, an ng, a terlanding.

. , -

www.pabraifunds.com


4/21

The ICU Checklist

on nes pu n o

patients annually in ICUs

days; 80,000 people.

-Increased ICU time.

he Line Insertion

checklist.

www.pabraifunds.com


5/21

The ICU Line Insertion Checklist

. as an s w soap.

2. Clean patients skin with chlorohexide antiseptic.3. Put sterile drapes over entire patient.4. Wear a sterile mask, hat, gown and gloves.

5. Put sterile dressing over catheter site after line in.

Very obvious; well-known; taught to all for ages. At least one step skipped in 1/3 of all insertions.

Doctors learning to appreciate checklists.

www.pabraifunds.com


6/21

Why are checklists so effective?

ur ra ns are es gne o a e s or -cu s an

arrive at answers quickly. When you see the lion, you run. You dont

process your options, you just run.

When we notice a great business is

undervalued, we read up on it, run through a

num er o concerns ques ons an arr ve a adecision not as effective as a checklist.

www.pabraifunds.com


7/21

The FAAs Approach to Aviation Safety

ery e ec ve; ower pro a y o y ng n an

airplane than crossing the street.

.

Aviation safety comes from carefully studying each

Changes to Checklists, pilot training, equipment,rocedures ATC etc.

Results are extremely compelling.

www.pabraifunds.com


8/21

Investing and The Checklist

o roc e sc ence. re y o v ous.

Start with stuff weve learned from Graham, Buffett,, , , .

Margin of Safety, Moats, Simple Businesses

Ma e a rea c ec st.

Examine all your mistakes that led to a

.Add to the checklist.

www.pabraifunds.com


9/21

Visceral vs. Direct Experience

oo a a e grea nves ors an e r m s a es.

Why did a given investment fail?

Could one have looked at that factor and knownof a possible problem beforeinvestment was made?

Muc muc c eaper to earn rom t e m sta es oothers than your own.

, ,Poor investment result. Why?

www.pabraifunds.com


10/21

Add to the Checklist

esco ma es very ew nves men s an even ewer

acquisitions.

.long hiatus.

-which is a fantastic company/culture/business.

Cort had abnormall hi h revenues FCF as a

result of internet bubble. Buffett/Munger clearlyknew the internet was a bubble.

www.pabraifunds.com


11/21


Checklist uer :

Are the revenues and cash flows of the businesssustainable or overstated/understated due to boomor bust conditions? (e.g. Cort)

Are there temporary tailwinds enhancing FCF?

Need to appreciate that this is easy to miss withmany businesses that have temporary tailwinds that

can e ar o e ec as e ng emporary. Minds as sharp as Munger and Buffett missed it.

www.pabraifunds.com


12/21

Buffetts Rare Mistakes

Berkshire Hathawa turned out to be a reat

investment. Buffett calls it a mistake. What was themistake?

Was a Graham net net. Bought below net workingcapital.

I ave ma e t s spec c m sta e numerous t mes.

Its now on the checklist. No more!

www.pabraifunds.com


13/21

Learning from Buffett

Downside protection Margin of Safety

Ive often been mesmerized by the strong downside- .

www.pabraifunds.com


14/21

The Evaporating Moat

I liked and admired Ed Colodny, the company's then-CEO, and Istill do. But my analysis of USAir's business was both superficialand wrong. I was so beguiled by the company's long history ofprofitable operations, and by the protection that ownership of asenior security seemingly offered me, that I overlooked the

crucial point: USAir's revenues would increasingly feel the effectso an unregu a e , erce y-compe ve mar e w ereas s cosstructure was a holdover from the days when regulationprotected profits. These costs, if left unchecked, portended

' , .

1996 Letter to Shareholders, Warren Buffett

www.pabraifunds.com


15/21


Checklist additions:

Is there a solid moat? (e.g. Berkshire Mills)

(e.g. US Air, Dexter Shoes)

wonderful businesses--well worth investing in--and a huge number of bad or mediocre businesses

a are no a rac ve as ong- erm o ngs .- Warren Buffett (in Money Masters of our Time)

www.pabraifunds.com


16/21

Using the Checklist

and am in the process of gathering mistakes made byother great investors.

60 items on checklist so far. Not done yet.

of health.

Different from healthcare or aviation.

Investments will have one or more issues.

www.pabraifunds.com


17/21

Using the Checklist

.

Checklist failure issues: Highly leveraged assets to equity. Could be subject to run on the bank.

High unemployment, recession will hurt.

checklist.

www.pabraifunds.com


18/21

What is one to do with Wells Fargo?

The events of 1929-33 1937 1973-74 2000-02 and

2008-09 have taught us that the ride can be quiterocky.

Likely to hit these major dislocating events at least afew times in an investing lifetime.

Any number multiplied by zero is zero.

All businesses fail on some checklist items.

Run a diversified portfolio. At least 20-30 names thatdo not correlate on the same issues (e.g. leverage).

www.pabraifunds.com


19/21

Checklist shows possible failure points

I used to believe in a 10x10 ortfolio until 308.

The drubbing of Q408 exposed clear weaknesses insome portfolio holdings. Size was key issue.

Moved to a 2, 5 or 10 model.

Fargo.

5% bets are t ical.

10% bets are made when 7 moons line up.

www.pabraifunds.com


20/21

Lessons Learned from 2008-09

Grahams entire framework emer ed after the 1929-

1933 Great Depression and collapse in equity prices. Since mistakes are inevitable and businesses alwaysfail on some checklist items, best to go back toGraham 101 and diversify.

No need to hold 100 names, but unwise to hold 4.

20-30 names seems just right.

Believer in the power of the simple checklist.

www.pabraifunds.com


21/21

Thank You.

Mohnish PabraiManaging Partner

a ra nves men un sIrvine, California, USA

[email protected]

www.pabraifunds.com

www.pabraifunds.com

pabrai checklist

Documents