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By Jason Stipp | 05-06-2010 11:15 AM

Pabrai: Check Yourself Before Investing

The cause of most investing mistakes is elementary and could have been prevented with a pre-investment checklist, says Pabrai Investment Funds Mohnish Pabrai.

Jason Stipp: I'm Jason Stipp for Morningstar. We're reporting from the Value Investing Congress in Pasadena, and I'm here with Mohnish Pabrai from the Pabrai Investment Funds. He talked today about the use of checklists in an investment process. He's going to tell us a little bit about that. Thanks for joining me Mohnish.

Mohnish Pabrai: Jason, great to be here.

Stipp: So the first question for you, you went through some examples of some industries where checklists have become critical. I think that you're sort of implying that you started some of your research about checklists there. What did you find in those industries and what did you learn about how checklists where employed there?

Pabrai: Well what I found is that they had profound before-and-after impact, life-altering impact. So, for example, in aviation extremely unsafe to extremely safe without much of a price being paid. The same with medicine with the basic stuff. The most important thing I learned was that when you look back at investing mistakes or surgery mistakes or aviation mistakes, the cause is elementary, and the cause could have been prevented a priori.

Stipp: So it seems like one of the key things that went across all the checklists was this idea of mistakes, so the checklist was born out of mistakes. So how important is that when you think about building a checklist?

Pabrai: I think mistakes is the best way, like the FAA does with aviation. I think it's a very powerful way because it means--that especially if you look at mistakes of the greats--it means that there was a great mind--it could be Warren Buffett, it could be John Templeton--it was a great mind that missed something elementary. So one should ask why that happened.

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