Mohnish Pabrai: Avoid Investment Pitfalls: Create An Aviation Safety Style Checklist

In this session with the CFA in the U.K, Mohnish Pabrai discusses the importance of learning from investment mistakes, both personal and those of renowned investors like Warren Buffett and Charlie Munger. He highlights the inevitability of errors in predicting the future and the value of studying past mistakes to avoid repeating them.

By converting these lessons into checklist questions, akin to aviation safety protocols, Pabrai developed a systematic approach to assess potential investments.

Here’s an excerpt from the session:

Charlie used to say to me that you want to learn from your mistakes but you don’t want to learn too much. Investing is a business where if you have a 50% error rate, 40% error rate, that’s par for the course.

So, it is a business where there’s going to be a large error rate because we’re trying to project into the future. Anytime you’re trying to project into the future, it’s fraught with uncertainties.

So, you’re going to have a lot of errors, and I think it’s a useful exercise to look at the things that have not worked and why they have not worked. It’s also a much richer data set if you can look at the investment mistakes of the greats because your own mistakes will take a long time to build a record. But if you were to look at Berkshire Hathaway or other investors you admire, we’ve got several decades of history, and so that can accelerate the learning, right?

Warren and Charlie have been very transparent about many mistakes they’ve made. You know, Dexter Shoes and for a long time, NetJets were a problem. They had problems with GEICO. And so, you can look at the businesses, and the question to ask is, what was very obvious at the time the investment was made by this great mind that was visible and should have been a showstopper, but the great mind missed it? And then, what I did is I converted that into a checklist question. And so, basically, it was looking at—that’s exactly how checklists were designed in aviation, and that’s why flying is so safe.

They came up with these checklists for pilots for takeoffs and landings and all these things based on making sure that they did all the things they were supposed to do. And so, the investing checklist was just ones based on errors.

So, if we saw that the Dexter Shoes investment didn’t work at Berkshire, we would ask the question, ‘Is this a business that can be decimated by lower-cost foreign manufacturers?’ for example. And so, that would become a conversion of the Dexter Shoes example.

Or, for example, the U.S. Air investment that Buffett made, you know, is the business unionized, and can unions do the business in? And is it a low-cost operator? So, U.S. Air was a high-cost operator, and it had unions, and it had Southwest basically come into its backyard and give them a lot of problems.

So, that’s how I went about building the checklist. It was faster to use other people’s mistakes. I also used my own mistakes, and that’s been actually quite useful.”

You can watch the entire session here: