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.Read Full Transcript
Stipp: Tell me a little bit about the process of building this checklist. It's great to think about people's mistakes, but you're actually going out and looking at past reports from some funds and compiling these mistakes. How is that process working?
Pabrai: The process has worked great. I did what I would call a quick first pass, where I've got about, I think, 80 positions that my stocks and other people's stocks where they had mistakes. But I think I only scratched the surface.
So, for example, I'd love to and in fact I'm going to this summer with the help of an intern, I'd like to look at Longleaf Partners or Third Avenue and look at all their mistakes over the last 20-odd years. So first create the list of mistakes. The second part, which is a little more difficult, is to reverse engineer what happened. In some cases, the Longleafs and Third Avenues have talked about it. So you can go to the letters and look at it. In other cases, they haven't. It had never been published or talked about. So those will be a little harder to figure out.
Stipp: About how many items do you have on your checklist?
Pabrai: There's about 80 items currently.
Stipp: So do you find that that size of checklist that you can get bogged down in that, or how long does it take you to...?
Pabrai: It actually goes very fast. I think running the checklist takes about half an hour.
Stipp: Your checklist, is it something that other people could use, or how is it employed? How personal is the checklist?
Pabrai: Yeah, I think if I would've published it, it would be of some use. But I think the person would get the most value if they built their own because I think it would just get seared in the psyche better, and they would take more seriously.
Stipp: There's just some things that you, as a person, you know you need that checklist.
Pabrai: That's right, yes, that's right. I think each of us is wired differently, and we're going to look at things differently.
Stipp: And have you credited your own checklist from saving you from a few mistakes, since you implemented it?
Pabrai: I think it's been fundamental, a fundamental shift in Pabrai Funds since the use of checklists.
Stipp: Well, great. Thanks so much for your insights. I think it's a very useful tip for investors. Hopefully, they can go out and make their own checklists as well. Thanks for joining me, Mohnish.
Pabrai: Thank you, all right, great.