People do not change life style over-night unless they are forced to, in the same way investment managers change their investing style. For Mohnish Pabrai, the head of Pabrai Funds, the change lately has been the adaption of a investment checklist. One can consider this his lesson learned after the 2008 financial crisis that devastated his funds.
In early April, 2010, Pabrai was interviewed by Steve Forbes and he discussed his checklist:
Here is the video for those of us like to receive information visually. The part concerning the checklist is towards the end of the interview:
Then in early May, 2010, Pabrai was a key-note speaker on Value Investing Conference. For his speech, GuruFocus columnistBen Claremon took good notes and this is the part concerning checklist:
Under the effect of the check list, There are the stocks Pabrai has kept buying and selling during the past two quarters:
Stocks that Pabrai Kept Buying
FAIRFAX FINL HLDGS LTD (FRFHF, Financial), Weightings: 9.28% - 80,886 Shares
Mohnish Pabrai owns 80,886 shares of FRFHF, valued as $31 million as of Mar. 31, 2010, which accounts for 9.28% of his equity portfolio. Mohnish Pabrai added his positions in the Dec. 31, 2009 quarter by 17.15%, again in the Mar. 31, 2010 quarter by 0.34%.
Fairfax Financial Holdings Limited is a financial services holding company which, through its subsidiaries, is engaged in property, casualty and life insurance and reinsurance, investment management and insurance claims management. with a P/E ratio of 9.8 and P/S ratio of 1.14. The dividend yield of Fairfax Finl Hldgs Ltd stocks is 2.63%.
Stocks that Mohnish Pabrai Keeps Selling
No. 1: Harvest Natural Resources Inc. (HNR, Financial), Weightings: 10.8% - 4,771,814 Shares
Mohnish Pabrai owns 4,771,814 shares of HNR, valued as $36 million as of Mar. 31, 2010, which accounts for 10.8% of his equity portfolio. Mohnish Pabrai reduced his positions in the Dec. 31, 2009 quarter by 1.04%, again in the Mar. 31, 2010 quarter by 14.74%.
Harvest Natural Resources, Inc. is an independent oil and gas exploration and development company with principal operations in Venezuela and Russia.
No. 2: Berkshire Hathaway Inc. (BRK.B, Financial), Weightings: 7.81% - 319,851 Shares
Mohnish Pabrai owns 319,851 shares of BRK.B, valued as $26 million as of Mar. 31, 2010, which accounts for 7.81% of his equity portfolio. Mohnish Pabrai reduced his positions in the Dec. 31, 2009 quarter by 1.54%, again in the Mar. 31, 2010 quarter by 0.02%.
Berkshire Hathaway Inc. is a holding company owning subsidiaries engaged in a number of diverse business activities. Berkshire Hathaway Inc. has a market cap of $203.11 billion; its shares were traded at around $81.9 with a P/E ratio of 24 and P/S ratio of 2. Berkshire Hathaway Inc. had an annual average earning growth of 13.2% over the past 10 years.
No. 3: Pinnacle Airlines Corp. (PNCL, Financial), Weightings: 4.48% - 2,002,902 Shares
Mohnish Pabrai owns 2,002,902 shares of PNCL, valued as $15 million as of Mar. 31, 2010, which accounts for 4.48% of his equity portfolio. Mohnish Pabrai reduced his positions in the Dec. 31, 2009 quarter by 4.93%, again in the Mar. 31, 2010 quarter by 0.25%.
Pinnacle Airlines Corp., a regional airline, offers scheduled passenger service throughout the United States. Pinnacle Airlines Corp. has a market cap of $97 million; its shares were traded at around $5.23 with a P/E ratio of 4.3 and P/S ratio of 0.1. Pinnacle Airlines Corp. had an annual average earning growth of 10.2% over the past 5 years.
Conclusion
Pabrai owns stocks of both Berkshire Hathaway and Fairfax Financial Holdings, run by Warren Buffett and Prem Watsa respectively. In the past two quarters, he has kept on buying one (Fairfax) and sold another other.
To check the complete list of of Mohnish Pabrai, please go to http://www.gurufocus.com/holdings.php?GuruName=Mohnish+Pabrai
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In early April, 2010, Pabrai was interviewed by Steve Forbes and he discussed his checklist:
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 10x10 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?
Pabrai: 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.
So 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.
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. 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.
Here is the video for those of us like to receive information visually. The part concerning the checklist is towards the end of the interview:
Then in early May, 2010, Pabrai was a key-note speaker on Value Investing Conference. For his speech, GuruFocus columnistBen Claremon took good notes and this is the part concerning checklist:
He started to study the concept of a checklist after reading Atul Guwande’s article in the New Yorker on checklists. The aviation checklist approach to flying came about after the failure of the Boeing B-17 project for the Army. Checklists in aviation became absolutely fundamental from there.
Key Breakthrough: all checklists for complex airplanes are similar and most of them are less than 12 items long. You couldn’t have a 7 page checklist because you could never get pilots to actually follow it. So, they broke it down to the most critical functions that absolutely had to be done. Aviation is now extremely safe and cheap. The system works well as a result of checklists.
What are the parallels to investing? How do we design the right checklist?
The FAA is a highly successful organization. They do nothing until a crash has happened but then they will spend months and years figuring out what happened. They will then model and see how many lives will best lost over the next 30 years if they do nothing. That entails determining what the value of a human life is. Right now we are each worth about $3M. They then multiply that times the number of potential deaths and use that value as a budget to try to make the changes they recommend. The changes will be within the context in terms of cost. Aviation improves only when there is a crash.
The best way to create an investment checklist is based on looking at crashes. These only include permanent loss of capital in Pabrai’s mind. The only humans who are 100% transparent when it comes to their mistakes are Warren and Charlie. But, to create a full list of pitfalls he then went through other high profile mistakes.
He looked at the error and each time he found a mistake, he added a question to the checklist that corresponded to that mistake. The project is still ongoing but he now has 80 on the list. This has not changed any of his processes for looking at companies. It is when he is about to pull the trigger that he pulls out the checklist. The first time he runs it then he usually finds 5-7 things that he doesn’t have answers to. This tells him to go find the answers and then run the checklist again. No company could give him a “go” on all 80 questions. But, the checklist system has started to show him how he should position size investments. He went from being very concentrated to being more diversified. The current baseline is
5% bet and then 10% if he thinks it is a homerun or 2% if it is a basket trade. So far, the error rate is 0% and he has made the most investments in his career during the period in which he began using the checklist.
Under the effect of the check list, There are the stocks Pabrai has kept buying and selling during the past two quarters:
Stocks that Pabrai Kept Buying
FAIRFAX FINL HLDGS LTD (FRFHF, Financial), Weightings: 9.28% - 80,886 Shares
Mohnish Pabrai owns 80,886 shares of FRFHF, valued as $31 million as of Mar. 31, 2010, which accounts for 9.28% of his equity portfolio. Mohnish Pabrai added his positions in the Dec. 31, 2009 quarter by 17.15%, again in the Mar. 31, 2010 quarter by 0.34%.
Fairfax Financial Holdings Limited is a financial services holding company which, through its subsidiaries, is engaged in property, casualty and life insurance and reinsurance, investment management and insurance claims management. with a P/E ratio of 9.8 and P/S ratio of 1.14. The dividend yield of Fairfax Finl Hldgs Ltd stocks is 2.63%.
Stocks that Mohnish Pabrai Keeps Selling
No. 1: Harvest Natural Resources Inc. (HNR, Financial), Weightings: 10.8% - 4,771,814 Shares
Mohnish Pabrai owns 4,771,814 shares of HNR, valued as $36 million as of Mar. 31, 2010, which accounts for 10.8% of his equity portfolio. Mohnish Pabrai reduced his positions in the Dec. 31, 2009 quarter by 1.04%, again in the Mar. 31, 2010 quarter by 14.74%.
Harvest Natural Resources, Inc. is an independent oil and gas exploration and development company with principal operations in Venezuela and Russia.
No. 2: Berkshire Hathaway Inc. (BRK.B, Financial), Weightings: 7.81% - 319,851 Shares
Mohnish Pabrai owns 319,851 shares of BRK.B, valued as $26 million as of Mar. 31, 2010, which accounts for 7.81% of his equity portfolio. Mohnish Pabrai reduced his positions in the Dec. 31, 2009 quarter by 1.54%, again in the Mar. 31, 2010 quarter by 0.02%.
Berkshire Hathaway Inc. is a holding company owning subsidiaries engaged in a number of diverse business activities. Berkshire Hathaway Inc. has a market cap of $203.11 billion; its shares were traded at around $81.9 with a P/E ratio of 24 and P/S ratio of 2. Berkshire Hathaway Inc. had an annual average earning growth of 13.2% over the past 10 years.
No. 3: Pinnacle Airlines Corp. (PNCL, Financial), Weightings: 4.48% - 2,002,902 Shares
Mohnish Pabrai owns 2,002,902 shares of PNCL, valued as $15 million as of Mar. 31, 2010, which accounts for 4.48% of his equity portfolio. Mohnish Pabrai reduced his positions in the Dec. 31, 2009 quarter by 4.93%, again in the Mar. 31, 2010 quarter by 0.25%.
Pinnacle Airlines Corp., a regional airline, offers scheduled passenger service throughout the United States. Pinnacle Airlines Corp. has a market cap of $97 million; its shares were traded at around $5.23 with a P/E ratio of 4.3 and P/S ratio of 0.1. Pinnacle Airlines Corp. had an annual average earning growth of 10.2% over the past 5 years.
Conclusion
Pabrai owns stocks of both Berkshire Hathaway and Fairfax Financial Holdings, run by Warren Buffett and Prem Watsa respectively. In the past two quarters, he has kept on buying one (Fairfax) and sold another other.
To check the complete list of of Mohnish Pabrai, please go to http://www.gurufocus.com/holdings.php?GuruName=Mohnish+Pabrai
Also check out:
