Mohnish Pabrai’s views on how to buy and sell stocks

Mohnish Pabrai divulged his views on how to buy and sell stocks through a series of interviews and lectures done over the years. The two books he has written also provide some information. He follows these few basic rules :
  1. Never take a loss if the position is held within two years. Should be willing to hold for three years for a stock to reach intrinsic value. Never place a stop loss order. Strive for long-term gains – minimize taxes.
  2. After two years, consider selling only if intrinsic value is below the current stock price.
  3. 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, pass.
Chapter 17 of his book “Mosaic – Perspectives on Investing” titled “Yes, But I Like to Punt!” provides several clues based on Warren Buffett's quotes:
  1. Rule #1: Never Lose Money, Rule #2: Never Forget Rule #1.
  2. We are perfectly willing to trade a big payoff for a certain payoff.
  3. Be fearful when the world is greedy and be greedy when the world is fearful.
  4. We don’t get paid for activity, just for being right.
  5. As for how long we will wait, we will wait indefinitely.
  6. It is not important how big one’s circle of competence is; knowing its boundaries, however is critical.
  7. I don’t try to jump over seven foot hurdles. I look for one-foot bars that I can step over.
  8. The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and above all the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.
  9. We can take our capital and move it into businesses that make sense.
  10. I am a better investor because I am a businessman and I am a better businessman because I am investor.
  11. When a management team with a reputation of brilliance joins a business with poor fundamental economics, it is the reputation of the business that remains intact.
  12. I did be a bum on the street with a tin cup if the market were always efficient.
  13. If they need my help to manage the enterprise, we are probably both in trouble.
  14. My idea of a group decision is looking in the mirror.
  15. Never ask your barber if you need a haircut.
His book “The Dhandho Investor: The Low Risk Value Method to High Returns” has a series of seven questions:

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 with a high degree of confidence?
3.    Is the business priced at a large discount to intrinsic value today and in two to three years?
4.    Would I be willing to invest a large portion of my net worth into this business?
5.    Is the downside minimal?
6.    Does the business have a moat?
7.    Is the business run by able and honest managers?

Mohnish Pabrai started using a check-list in the 3rd quarter of 2008. His check-list is known to have around 80 questions. Although, he has never made the check-list public, he has revealed a number of items in the check-list in interviews and presentations. Below is a list we have compiled:
  1. Margin of Safety – A good investment needs good downside protection.
  2. Moats – A good investment needs to have a good upside earnings engine. Is there a solid moat? Could the moat be shrinking/evaporating?
  3. Is it a simple easy to understand business?
  4. Are the revenues and cash flows of the business sustainable? Are you looking at normalized earnings or boom-time earnings? – Example Cort Furniture purchase by Wesco – the volumes were high due to Internet bubble – Buffer/Munger mistake.
  5. Is it a Graham Net/Net play? – Bought below net working capital. Special Situation – good downside protection and chance of high returns, but probability is very low - Cash and short-term investments + (0.75 * accounts receivable) + (0.5 * inventory) - total liabilities.
  6. Is the company’s business becoming unregulated? – that could cause the moat to quickly evaporate  - regulated businesses have high cost structures which would be disastrous in a competitive unregulated landscape – an example of such a mistake is Warren Buffet’s investment in US Air which he acknowledged as a mistake in the 1996 letter to shareholders.
  7. Assets to Equity – Is the company too leveraged?
  8. Could the company have made bad lending decisions? – bank specific.
  9. How much will high unemployment and recession hurt the business?
  10. Is the investment correlated to one or more of your existing holdings? – holding many business that are correlated can result in an undiversified portfolio.
  11. Can this business be decimated by low-cost competition from China or other low-cost countries? – example – Warren Buffett’s investment in Dexter Shoes.
  12. Is this a win-win business for the entire ecosystem? – avoids tobacco, gambling, predatory lenders, etc.
  13. Mohnish Pabrai has said he has ten check-list questions on leverage – How much?, What are the covenants? Are they recourse or non-recourse?, etc.
  14. There are five questions on management - Management Compensation? Interests of Management – Is it aligned with shareholders? Management’s historical track-record?, Does Management have a large stake in the company?
  15. Unions & collective bargaining issues related questions – Does the company have union issues?

Readers, if you know of other check-list items, please drop in a line and help us complete this list.

Related Posts:
  1. Tracking Stocks in Mohnish Pabrai's Investment Funds - Part I.


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