Mohnish Pabrai is one of the best-known value investors on the planet and is known by many for his intensive use of checklists. According to an interview with Forbes on 25 June 2018, his pre-investment checklist now consists of around 150 questions, divided into five to ten different categories. However, the essential three categories make up the lion's share with 70-80%.

In this article, I would like to introduce you to Mohnish Pabrai's so-called "Dhandho Checklist" (named after the title of his latest book, The Dhandho Investor) as well as go into a little more detail about his approach to building the checklist. As you will see, Pabrai's approach to investing is relatively close to Warren Buffett's... so far, obviously, with some success.

By the way, Dhandho translates as "efforts that create wealth".

Mohnish Pabrai, the Checklist Investor

According to Mohnish Pabrai, a checklist is a very helpful tool in selecting suitable investments. The main advantage: compared to the time it takes to go through the checklist, the gain in knowledge is usually enormous.

"The checklist is a wonderful tool and I think that every investor should use it." Mohnish Pabrai

Pabrai's current checklist contained about 150 questions at the time of the Forbes interview. He started about 10 years ago with about 80 to 90. Over time, Pabrai has continuously refined his checklist and added about 50 to 60 new questions. Even today, according to his own statement, more content is added, but not at the same speed as in the past. The checklist is therefore a dynamic and living document.

Interestingly, 70-80% of the questions on Pabrai's checklist fall naturally into one of the following three categories (other topics include regulatory issues and employee participation):

  • Financial stability or leverage
  • Management and ownership
  • Competitive advantages or moats

This is probably due to the fact that a large part of all wrong decisions made in connection with the purchase of shares can be traced back to wrong conclusions or misjudgements regarding these three areas.

Pabrai's checklist is accordingly based, among other things, on a detailed analysis of investment mistakes made by well-known investors. Warren Buffett's Shareholder Letters were obviously a very rich source of information for Pabrai (although he did not limit himself to this, of course, but also analysed his own mistakes and those of others in detail).

"It's good to learn from your mistakes. It's better to learn from other people's mistakes."

Warren Buffett

The use of the checklist

If I interpret his statements correctly, Mohnish Pabrai's checklist is not congruent with his investment process, but rather serves as a final review before clicking the "buy" button (content review versus process checklist).

According to Pabrai, this final review does not take a great deal of time, but of course requires the appropriate groundwork. As a rule, Pabrai goes through his checklist completely at least twice before making the final investment decision, with the second time typically taking no longer than 20 to 30 minutes.

The short version: The Dhandho checklist

Note in advance: in The Dhandho Investor, Mohnish Pabrai does not go into detail about the very comprehensive checklist referred to in his many interviews and lectures. Instead, towards the end of his book, he provides a summary of the essential questions we should ask ourselves before buying a stake in a company in the form of a share.

He provides the following rationale for this: first, the checklist is also part of the competitive advantage that Pabrai has built for himself over time. Secondly - and in my view the argument is even more valid - a checklist in this high level of detail is only of use to the investor who has developed the list himself (much of the learning is in the process itself).

Nevertheless, it can of course not be wrong to take a look at the "high level" checklist from the book. So here is the abbreviated checklist with the essential 7 core questions that we should be able to answer "yes" to in order to make a positive investment decision for ourselves:

  1. Do we understand the industry and the company? Are they within our circle of competence?
  2. Do we know the current intrinsic value of the company and can we predict with a high degree of probability how it will develop over the next few years?
  3. Is the company trading at a high discount (over 50%) to its intrinsic value - today and also in two to three years' time?
  4. Would we be willing to invest a large part of our capital in the company?
  5. Are the risks minimal?
  6. Does the company have a sustainable competitive advantage (called moat)?
  7.  Is the company run by capable and honest managers?
About Alexander Kelm

Alexander Kelm is a passionate value investor and runs the website Wall St. Nerd. Here, the passionate value investor writes in-depth articles on the topic of Value Investing. Value Investing involves analyzing a company's fundamentals and can be characterized by an intense focus on a stock's price, its intrinsic value and the relationship between the two.

Alexander Kelm offers online courses on stock investing.

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