Mohnish started building an investment checklist

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Mohnish Pabrai spoke on the second day of the conference.

Mohnish Pabrai, is Managing Partner of Pabrai Investment Funds, a group of focused value funds. Since inception in 1999 with $1 million, Pabrai Funds has grown to over $500 million in assets under management. Pabrai is the author of two books on value investing,Mosaic andThe Dhandho Investor.

Mohnish Pabrai’s talk centers on checklists for investing. Mohnish “highly, highly recommends reading Dr. Atul’s book,The Checklist Manifesto: How to Get Things Right.”

In 1935 when the US was looking for next bomber, Boeing invented the B-17 bomber widely exceeded everything the army had previously put out, however they had a test run and two pilots died.

Boeing went back to look at what happened. And they realized that this was too complex. So Boeing engineers came up with a checklist. Afterwards the plan had a flawless bomber.

Today the aviation check list has become very organized, and the pilots are trained to live and die by that checklist.

The list is highly practical and easy to understand. The checklist is extensively researched and is stimulated by flight simulators to see if anything should be added or subtracted.

In America there are five million lines inserted into America in ICUs. About 80% of these line insertions led to infection, of which 20-25% of which were fatal.

A doctor in John Hopkins had nurses stand by the doctors before line insertions.

He listed five points in his check list which are all pretty basic thinks like washing hands with soaps before line insertions.

Nurses noticed that a lot of these rules were missed, so he had the nurses make sure the doctor kept to the five rules. After this happened the amount of infections went down to zero. He took this approach to other hospitals. And nowadays this procedure has become standard in US hospitals.

The FAA is actually one of the most successful agencies.

The FAA has very little to do with actual flights, they only go into action when an accident occurs. The FAA gets down of what happened. Bird hits happen to be a major problem for airplanes. When the Hudson crash occurred due to the Canadian geese, the FAA made sure to keep better track of Canadian Geese.

Flying is very cheap and safe. However, the nuclear industry took a different approach which was not pragmatic and could not tolerate a single human life. And we are praying the price 20 years later.

Mohnish found that the FAA approach could be used in investing. He compares a crash to a loss of capital.

Mohnish started building an investment checklist. He looked at mistakes Warren Buffett and Charlie Munger made and mistakes by other great value investors.

Mohnish compiled a list of 70 items two years ago. Since then Mohnish has achieved a zero error rate. However, Mohnish warns there are bound to be errors in the future.

Mohnish looked at many the great fund’s 13Fs from 2004 to see approximately what their buy price and look at their sell price. He analyzed twelve investors and came up with a list of 320 companies that these investors lost money in totaling $20 billion. He looked at why they might have bought and sold these securities.

He picked 26 of the 320 companies and looked in depth at them. He only looked at three financial companies to diversify across industries. Now Mohnish is up to 97 points in his checklist.

Mohnish quotes Jack Welsh as stating that GE will only be in an industry where they are number one or two.

HP and Lexmark had a duopoly in printers. Oakmark and Davis Funds lost a lot of money in Lexmark.

However, if you looked at checklist you likely would have avoided this investment. Lexmark was more similar to Schick than to Gillette.

One are with the largest area of mistakes has to do with moats. The question that must be asked is if the moat is sinking. LongLeaf lost $550 million in Sun Micro systems.

There was a huge decrease in computer prices over the past few years, plus a shift from desktops to laptops this affected Dell a lot. LongLeaf, and Fairfax had some pain in that company.

LongLeaf bought GM thinking that GM owned the truck business. When gas went to $4, GM was decimated. One of the checklist items is to look at what other factors can affect a moat in this case being commodity prices.

There are give categories in the check list:

Personal biases are a small part.

Leverage, Management, Moat and valuation are the main four items of the checklists.

The checklist highlights the possible main failure points. But there will never be an investment that will fit all 97 items.

Mohnish is currently building a cheap Japanese basket of cheap stocks. Mohnish believes there is a great opportunity in that market. Despite the fact that it is hard to invest in the low cap and micro cap Japanese stocks.

Mohnish does not currently have a checklist for selling.

Disclosure: No Positions