A master investor’s playbook

Mohnish Pabrai explains his step-by-step process for analyzing a company

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During a recent interview on the Mis Propias Finanzas Podcast, Mohnish Pabrai shared his wisdom on friendships, books and mental models, and he also shared a glimpse into his investing research process.

When asked a simple question — how does he read an annual report — as great teachers do, Pabrai goes on to give an answer to a much better question — he answers how he analyzes a business by spelling out his step-by-step process.

He said:

“So it depends on the business. As you know, I’m the shameless cloner, so the first thing I’m ideally trying to do, is hopefully someone smarter than me already owns the stock and hopefully they have made some comments about it. So the first thing I try to look for is, who are the shareholders? And usually I don’t need to look at the shareholders because [the company is] coming through someone I admire and they have this particular company as a holding.”

“It’s ideal for me if there’s a writeup on Value Investors Club. So you know, there are thousands of writeups on Value Investors Club, and it’s a pretty well curated site. So when I find a company that’s on my radar, the first thing I look for is a VIC writeup. And even if the writeups are old, I will print off all the VIC writeups, all the messages, and all the comments, everything on all the writeups. That’s the first thing I want to read. Because that is giving me a digested, condensed view of the business that would take a long time if I just sat and read the annual reports. [The write up author] has already digested a lot of the data…and I can ratify that later, but at least it’s giving me a head start. Because the first thing I’m trying to do is, any time I’m looking at a company, I’m looking for a reason to take a pass. So the VIC writeups are designed to help me get to a point where I say, no, I thought this might be interesting, but it’s not that interesting. So I can let it go.”

“If I get past the VIC writeups, and I’m still interested, usually if the company is giving letters to shareholders, and it appears that those letters to shareholders aren’t written by a PR firm…I’ll have my assistant just make a PDF of all the twenty or thirty years of letters — starting with the oldest one. And then I just read the letters. Because then I can say, okay, what were they saying in ‘95 and then what happen by 2000. What were they saying in 2000, and what happened by 2005? I can see what they were saying and how has the trajectory of the business gone subsequently?

The other interesting thing about reading these letters is, especially reading those [from] the past…for example we know that in ‘08 and ‘09 a tsunami is coming. We know that. So when I’m reading the 2005 letter, 2006 letter, 2007 letter…they don’t know that…but I know that…you can see that whole thing play out in the letters. That kind of gives you a view of how the company deals with [crises and] how resilient the business model is. Same thing with the pandemic, right? We can see what 2018 and 2019 look like. And suddenly the pandemic hits and some businesses getting tailwinds and a lot of them are facing headwinds.”

“If I am still interested in the business after reading the letters, then I go to the [quarterly call] transcripts. So now the transcripts [are] definitely not written by a PR firm, right, because this is actually investors and analysts asking questions and so on and so forth. So I’m not that interested in the prepared remarks in the transcript because that would be similar to the reports and the annual reports because they’re controlling that messaging. But especially the companies that don’t write their own letters, I’m really interested in the Q&A. And of course I have to sift through stuff, because the analyst will ask some stupid question about next quarter and do you expect to beat by one penny or two pennies. And that sort of thing is not really relevant. But what I’m looking for is, when in different questions their being asked about the business and they’re making comments about the business…and I have the full future in front of me and how did it unfold? Did they under promise and over deliver? Or did they over promise and under deliver? Are they conservative, are they aggressive? You know, those sorts of things.

[Next] we can then look at the proxies because that gives me a good feel for the stock dilution and compensation plans and all of that, and how that is playing out.

And then after all of that, if I’m still interested, then we start plowing into the financials and different parts of the annual reports, risk factors and so on.

So that’s usually the journey.

(Note: The above quote was abridged lightly to maintain the logic and flow of Pabrai’s answer. Listen to the full interview here.)

Insights

• Good students ask good questions. Good teachers know how to give an impactful answer no matter the quality of the question.

• Copy and listen to people who are smarter than yourself.

• Pabrai’s analysis process for a company on one’s radar: 1) print out and read all the VIC writeups, comments and messages on the company; 2) print out and read all the shareholder letters, starting with the oldest; 3) print out and read all the quarterly call transcripts; 4) read all the proxies, paying attention to stock dilution and compensation plans; 5) read the annual and quarterly reports

• Throughout the the entire research process, be searching for a reason to say no to the opportunity.

• It’s a journey, so enjoy it.