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
- Wash hands with soap.
- Clean patient’s skin with chlorohexide antiseptic.
- Put sterile drapes over entire patient.
- Wear a sterile mask, hat, gown and gloves.
- 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.
See full PDF below.