In his article titled – On Avoiding Enron-itis!, Mohnish Pabrai discussed his starting point in assessing any business. Here’s an excerpt from the article:
When I am beginning to look at a company, my starting point is Item 1 in the 10-K which describes the business. If this description does not give me a solid feel for the business, I usually stop right there and exit. In my opinion, any business can be explained to a layman in 2-3 pages at most.
Usually it should take no more than a paragraph. If it’s obtuse then, like accounting statements, I perceive management as being deliberately obtuse and exit. If the description makes sense, then before reading the rest, I listen to the most recent conference call.
I am more interested in the nature of management than what they are saying. I try to gauge their shareholder orientation and ethos from the way they run the call.
What do the CEO and CFO emphasize? How do they handle the Q&A? How candid are they? Are they genuinely trying to help the listener gauge the reality of the business?
After the call, if I feel great about “partnering” with the management team, I’ll spend several days building a mental model about the future based on data from the company and others, past knowledge and experience before making a decision to move forward.
To summarize, if seven moons don’t line up, I don’t make the investment. Avoiding Enronitis is simple, but not necessarily easy. It takes determination, discipline and one must enjoy kissing lots and lots of frogs to find the rare prince.
You can read the entire article here:
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