Mohnish Pabrai is a classic value investor in the tradition of Warren Buffett, Charlie Munger and Seth Klarman. He currently manages an approx $500 mn fund which is highly concentrated. In the great crash of 2008, his portfolio got decimated and had a huge drawdown. It compounded at negative 47% almost a year and half - 2008 and 2009. He attributes this to hubris as he didn't have negative returns even in 2000 during the dotcom crash. He says that he completely missed the housing bubble.
Pabrai then drew upon the idea of a checklist from a NYT article and read The Checklist Manifesto by Dr Atul Gawande. Dr Gawande got the idea from the aviation industry where checklists were used to lower the number of human errors.
An excerpt from the article:
"In 2001 a critical-care specialist at Johns Hopkins Hospital decided to give it a try. He didn’t attempt to make the checklist cover everything; he designed it to tackle just one problem: line infections. He plotted out the steps to take in order to avoid infections when putting a line in. Doctors are supposed to (1) wash their hands with soap, (2) clean the patient’s skin with chlorhexidine antiseptic, (3) put sterile drapes over the entire patient, (4) wear a sterile mask, hat, gown, and gloves, and (5) put a sterile dressing over the catheter site once the line is in. Check, check, check, check, check. These steps are no-brainers; they have been known and taught for years. So it seemed silly to make a checklist just for them. Still, Pronovost asked the nurses in his I.C.U. to observe the doctors for a month as they put lines into patients, and record how often they completed each step. In more than a third of patients, they skipped at least one.
The next month, he and his team persuaded the hospital administration to authorize nurses to stop doctors if they saw them skipping a step on the checklist. This was revolutionary. The specialist and his colleagues monitored what happened for a year afterward. The results were so dramatic that they weren’t sure whether to believe them: the ten-day line-infection rate went from eleven per cent to zero."
Pabrai studied his own investing errors and asked the question as to were there factors which were clearly visible before the investment was made. In most cases where the investment went bad, he found that the factors were visible. He looked at his own portfolio as well the portfolio of investors like Warren Buffett etc. and studied their mistakes and if these mistakes were identifiable at the time the investment was made. He then came up with his check list which has about 97 questions.
He also talks to a like minded investor, who has no vested interest in the outcome, and runs him through his investing thesis. This is a good way to check confirmation bias.
So depending on whether you invest directly in equities or indirectly in mutual funds, you must have a written down checklist of factors that you must keep in mind while making any investing decision. We may think that we have covered all factors, but very often we miss a few often.
I have my own checklist and I urge you all to make yours too.
If you want help on making one, please email me and I shall be happy to help you with it.
Regards
Anish
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