Mohnish Pabrai: My Step-by-Step Approach to Investment Analysis

In this Q&A session with Mis Propias Finanzas, Mohnish Pabrai provides a roadmap of his entire investment approach, focusing on his “circle of competence” and leveraging insights from experienced investors.

He starts by analyzing shareholder holdings to identify reputable investors backing a company, often seeking writeups on Value Investors Club for a condensed view.

Pabrai examines shareholder letters to understand the company’s history and resilience through economic shifts. He also reviews Q&A transcripts for unscripted insights into management’s authenticity and business trajectory.

Finally, he evaluates proxies and financials, seeking reasons to abandon or continue exploring an investment, emphasizing thorough research and disciplined selectivity.

Here’s an excerpt from the session:

Pabrai: Well, I think as far as the circle of competence goes, to ask the question is to answer it. If you are wondering whether something is within your circle of competence or not, the answer is it is not in your circle of competence.

If something is within your circle of competence, you would know how to value the business, you would know how it makes money, you would know what a likely trajectory of that business within some ranges and boundaries. So it depends on the business.

Usually, my most preferred starting point on a company is to see, as you know, I’m the shameless cloner, so the first thing I’m trying to ideally try to do is hopefully someone smarter than me already owns the stock.

Hopefully, they have made some comments about it. The first thing I try to look for is who are these shareholders.

Usually, I don’t need to look at the shareholders because usually it is coming through some guy or some fund that I admire, and they have this company as a holding.

It is ideal for me if there is a writeup on Value Investors Club. There are thousands of writeups on Value Investors Club, and it’s a pretty well-curated site.

When I find a company that’s on my radar, the first thing I look for is; is there a week writeup? Even if the writeups are old, I will print off all the week writeups with all the messages and all the comments, everything on all the writeups. That’s the first thing I want to read because that is giving me a digested and condensed view of the business.

That would take a long time if I just sat and read the annual reports. This is someone who’s already digested a lot of the data, and I can ratify that later, but at least it’s giving me a head start because the first thing I’m trying to do is, anytime I’m looking at a business, I’m looking for a reason to stop looking and take a pass.

The VIC writeups are designed to help me get to a point where I say, “no, I thought this might be interesting, but it’s not that interesting, so, I can let it go.”

If I get past the VIC writeups and I’m still interested, usually if the company is giving us letters to shareholders and it appears that those letters to shareholders are not written by a PR firm, then it’s not the entire annual report.

I’ll have my assistant just make a PDF of all the 20, 30 years of letters starting with the oldest one. Then I just read the letters because after then I can say, okay, what were they saying in 95? What happened by 2000? What were they saying in 2000? What happened by 2005? I can just see kind of what they were saying versus how the trajectory of the business has gone subsequently.

The other interesting thing about reading these letters, especially reading them in the past, for example, we know that in 08, 09 a tsunami is coming. We know that.

When I’m reading the 2005 letter or 2006 letter or 2007 letter, they don’t know that, but I know that. It’s like you’re about to go off the cliff down the waterfall, but you don’t know that, then they’re in the waterfall, and then they’re finally at the bottom.

You can see that whole thing play out in the letter. That kind of gives you a view of how the company deals with adversity, how resilient the business model is, and it’s the same thing with the pandemic. We can see what 2018, 2019 looks like, and then suddenly the pandemic hits, and some businesses are getting tailwinds and a lot of them are facing headwinds.

If I am still interested in the business after reading the letters, then I go to the transcripts. The transcripts can be a little bit more… it’s actually definitely not written by a PR firm because this is actually investors and analysts asking questions and so on.

I’m not that interested in the prepared remarks in the transcript because that will be similar to what’s in the annual reports since they’re controlling that messaging.

But especially with companies that don’t write their own letters, etc., I’m really interested in the Q&A. Of course, I have to sift through stuff because the analysts will ask some stupid question about next quarter, like, do you expect to beat by one penny or two pennies? That sort of thing, which is not really relevant. ‘

But what I’m looking for is, when different questions are being asked about the business and they’re making different comments, I have the full future in front of me and just how did they unfold. Did they underpromise and overdeliver or did they overpromise and underdeliver? Or are they conservative? Are they aggressive? Those sorts of things.

We can then look at the proxies because that gives me a good feel for the stock dilution, comp plans, all of that, and how that is playing out.

After all of that, if I’m still interested, then we start plowing into the financials and different parts of the annual report, risk factors, and so on.

That’s usually the journey.

You can watch the entire session here: