Value Investing

How Mohnish Pabrai And Charlie Munger Use A Checklist

How Mohnish Pabrai And Charlie Munger Use A Checklist – also see Checklist manifesto and the book  The Checklist Manifesto

“Too Much Plane for One Man to Fly”

  • After the B-17 c ash Boeing’s s B 17 crash, survival was in question.
    • The aviation checklist was born.
    • Too complex for one man’s memory
    • Four checklists – takeoff, flight, landing, after landing.
  • Zero accidents – govt ordered 12,731 B-17 bombers

The ICU Checklist

  • 5 Million Lines put into p t patients annually in ICUs
  • 4% infected after 10 days; 80,000 people.
  • Fatal 5 28% of time. 5-28% Increased ICU time.
  • The Line Insertion checklist.

The ICU Line Insertion Checklist

  1. Wash hands with soap.
  2. Clean patient’s skin with chlorohexide antiseptic.
  3. Put sterile drapes over entire patient.
  4. Wear a sterile mask, hat, gown and gloves.
  5. Put sterile dressing over catheter site after line in.
  • Very obvious; well-known; taught to all for ages.
  • At least one step skipped in 1/3 of all insertions.
  • Infection rate after checklist – approached zero!
  • Doctors learning to appreciate checklists.

Why are checklists so effective?

  • Our brains are designed to take short-cuts and arrive at answers quickly.
    • When you see the lion, you run. You don’t process your options, you just run.
  • We are also a mix of rationality and emotions.
    • When we notice a great business is undervalued, we read up on it, run through a number of concerns/questions and arrive at a decision – not as effective as a checklist.

The FAA’s Approach to Aviation Safety

  • Very effective; Lower probability of dying in an airplane than crossing the street.
  • A human life is worth $3 Million.
  • Aviation safety comes from carefully studying each and every plane crash worldwide.
    • Changes to Checklists, pilot training, equipment, procedures, ATC etc.
    • Results are extremely compelling.

Investing and The Checklist

  • Not rocket science. Pretty obvious.
  • Start with stuff we’ve learned from Graham, Buffett, Munger, Klarman, Fisher, Templeton etc.
    • Margin of Safety, Moats, Simple Businesses…
    • Make a real checklist.
    • Examine all your mistakes that led to a permanent loss of capital – the plane crashed.
      • Add to the checklist.

Visceral vs. Direct Experience

  • Look at all the great investors and their mistakes.
    • Why did a given investment fail?
    • Could one have looked at that factor and known of a possible problem before investment was made?
    • Much much cheaper to learn  from the mistakes of others than your own.
  • In 2000, Munger bought Cort Furniture for Wesco, 2000 Wesco Poor investment result. Why?

Add to the Checklist

  • Wesco makes very few investments and even fewer acquisitions.
    • Cort was acquired in Feb 2000 by Wesco after a long hiatus.
    • Munger compares it to Enterprise Rent-acar, which is a fantastic company/culture/business.
    • Cort had abnormally high revenues/FCF as a result of internet bubble. Buffett/Munger clearly knew the internet was a bubble.
  • Checklist query:
    • Are the revenues and cash flows of the business sustainable or overstated/understated due to boom or bust conditions? (e.g. Cort)
    • Are there temporary tailwinds enhancing FCF?
  • Need to appreciate that this is easy to miss with many businesses that have temporary tailwinds that can be hard to detect as being temporary temporary.
    • Minds as sharp as Munger and Buffett missed it.

Buffett’s Rare Mistakes

  • Berkshire Hathaway turned out to be a great investment. Buffett calls it a mistake. What was the mistake?
    • Was a Graham net net. Bought below net working capital.
  • I have made this specific mistake numerous times.
    • It’s now on the checklist. No more!

Learning from Buffett

  • A good investment needs two facets to be in place:
    • Downside protection – Margin of Safety
    • Upside earnings engine – Moat
  • I’ve often been mesmerized by the strong downside protection and overlooked the all-important moat.

How Mohnish Pabrai And Charlie Munger Use A Checklist

See full PDF below.

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