market folly

Value investor Mohnish Pabrai sat down for an interview with The Motley Fool to talk about his approach and how he uses checklists in his investment process.


Checklist Investing & Learning From Mistakes


Pabrai had an epiphany after learning from concepts discussed in Atul Gawande's book The Checklist Manifesto.  Essentially, he tries to learn from his mistakes by figuring out what went wrong with certain investments and how he could have prevented losses/a specific outcome.

But he also looked at some of the best investors in the world and incorporated their mistakes as well (looking at Warren Buffett, Charlie Munger, LongLeaf Partners, Third Avenue, etc).


Pabrai's Investment Checklist

Pabrai says that, "And what was stunning to me is that in almost all cases where I could figure out the reason for the loss, it was very apparent before the investment was made, number one. And the second is the reason was very basic. It wasn't some esoteric reason that you had to do some higher math to the fifth decimal to figure out this wasn't going to work. It was very basic."

While Pabrai has never revealed his checklist, he notes that there's about 98 questions on it that examines before making an investment.  He does drop a few hints as to what he looks for though:

"So for example, we have a set of questions which relate to leverage. Debt covenants, how levered and all kinds of different issues related to leverage, because that has caused a lot of investments to go south.  We have another set which relates to moats, the lack thereof, right? And so all kinds of things. There's another set of questions which relate to things like unions and labor relations. There's another whole set of questions on management and ownership. Just all kinds of nuances of whether they own stock, do they act like owners and all those sorts of things that come up. And then there are a few miscellaneous ones."

Since applying the checklist, Pabrai feels that his investment error rate has dropped significantly.  Embedded below is the video of Pabrai's interview on checklist investing:




For more from this value investor, be sure to also check out what Pabrai learned from lunch with Charlie Munger and Warren Buffett.