Today, I listened to a talk given by Mohnish Pabrai early this year.
He talked about the idea of using a checklist that he runs against each of his new investment ideas before investing. The checklist has about 65 questions and is growing slowly. In his checklist, he maintains a list of failed investments, made by which investor and why it failed.
He even gave a way to build the checklist. Look at all the quarterly 13F filings for any great value investor and assume that all investments were made at the mid point of the quarter. Then, look at the next 13F filing to see if any of the investments dropped out. Assume that the investment was sold at the half way point of the quarter. For any investment that dropped in value, analyze why it dropped in value and that would have caused the investor to sell the investment. He said this can be done for all the great investors Buffett, Munger, Klarman, Whitman to develop a great checklist.
He says he does not come across any investment idea that passes all the checklist questions. Pabrai says that he first does his research and then before pulling the trigger he runs his checklist in 30 minutes. Some time there are questions in the checklist that he does not know the answer to. He has to go back and do more research to find those answers and re-run the checklist.
Pabrai says that the checklist has made one change in his portfolio management style. Earlier, Pabrai ran a 10 stock portfolio. After a few of his stocks went to 0, he realized that this was painful. He heard Seth Klarman talk about portfolio sizing. He now uses his checklist to help him decide how much he should invest in an idea. The max is 10% – very rarely. Most are 5%, then some are 2-3% and then ofcourse 0%.