Mohnish Pabrai: How To Assess Any Business In 30 Seconds

In his recent interview on The One Percent Show, Mohnish Pabrai explains how to assess any business in 30 seconds. Here’s an excerpt from the interview:

Pabrai: If I looked at something like MasterCard, it would very quickly make sense, because they get a certain percentage of every transaction, and it’s a bunch of servers. I mean, it’s going to be 80% margin business, because after you have scale, every incremental transaction almost has no cost.

So, you can tell very quickly if a business has great economics or not, doesn’t take much time, what does take more time is the durability. You can tell whether a business is a good business or not, the second question, is it a durable, that’s a much harder question. And if you’re going through it in 30 seconds, you have to run through in your head all kinds of things about durability.

I’m reading a book by Terry Smith. Terry Smith runs Fundsmith in the UK, with I think £30 billion under management. He says, “I don’t want to pick winners.” He says picking winners is very hard. “I want to call the winner after the race has ended.”

So, he says that basically once the race has ended, we know who the winner is, and that’s who I want to invest with. What he means by that is, he has no interest in any companies which don’t have a very long history. So, he’s interested in Nestle with 150-year history, where I think there was one quarter they lost money or something, or like Colgate-Palmolive and so on, or Microsoft or whatever.

So, he’s saying, “These companies already won. Nestle has won, Microsoft has won, all these companies have won, so I just want to look at all the winners, and then just pick from those.”

His approach is, we know their return on equity is high, we know that they have durability, because they’ve already shown they’re durable. Who’s going to take Nestle out? Who’s going to take Unilever out? His approach to that is, I’m going to answer the question in a simple way, which is the race is already over.

I think that if you use those two models, if you just have the durability and the return on equity, those are the only things you really looked at, you could pretty much in 30 seconds get there with a lot of businesses.

You can listen to the entire discussion here: