Table of Contents
- 1 Checklist: Can the business be decimated by a low-cost competitor?
- 2 Checklist: Is this a win-win business for the entire ecosystem?
- 3 Checklist: Is there too much leverage in the business?
- 4 Checklist: Does the business have good management in place?
- 5 Checklist: Does the management get paid too high?
- 6 Checklist: Does the management’s interest align with the shareholders?
- 7 Checklist: Does the business have strong unions with frequent collective bargaining?
- 8 Checklist: Are you looking at normalized earnings or boomed earnings?
Mohnish Pabrai is known as India’s Warren Buffet. He is also a good friend of Charlie Munger. Let’s check his checklist before buying stocks.
Pabrai has around 80 items on his checklist. We just share some of the most important checklists from his interview.
He looked at businesses where people lose money and created a checklist from their mistakes.
The question you have to ask is how have the rich failed before?
Checklist: Can the business be decimated by a low-cost competitor?
Warren Buffett lost money buying Berkshire which lost competition from the low-cost textile producer from China.
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Wall streets make money on activities, we, as value investors, make money on inactivities.
Checklist: Is this a win-win business for the entire ecosystem?
If a business is selling high-interest credit cards, it does not help the whole society.
The gambling business is also not a good one for the whole of humanity.
Checklist: Is there too much leverage in the business?
What is the current ratio?
What is the quick ratio?
Checklist: Does the business have good management in place?
Checklist: Does the management get paid too high?
How many percent of ownership does the management have in the company they worked for?
Checklist: Does the business have strong unions with frequent collective bargaining?
If the unions are winning frequently having a bigger paycheck, the business’s margins would go down like a downward spiral.
Checklist: Are you looking at normalized earnings or boomed earnings?
Charlie Munger made the mistakes of buying Court furniture at the peak of the dot com boom, where they do a lot of office furniture rentals.
An example of boomed earnings is the surged earnings of the shipping companies during the 2021 COVID-19 supply chain disruption. Their sales were up mainly due to outside factors of the surged freight price.
Normalized earnings come from good management rather than outside factors.
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