Mohnish Pabrai: Great Stock Selection Starts With Rejecting New Investment Opportunities For The Flimsiest Possible Reasons

Here’s a great interview with Mohnish Pabrai and The London Business School. During the interview Pabrai discusses his stock selection process, which he says starts with getting rid of new investment opportunities for the flimsiest possible reason. Here’s an excerpt from the interview:

Mohnish Pabrai: I’ll give it a shot of what actually happens after I see a stock.

So my objective whenever I encounter any stocks is to as quickly as possible reject the idea so I can get back to general reading. The model is not to find investments the model is to find the flimsiest reason to say no and as soon as I get to the first reason I’m done and I move on and usually two things work pretty well for getting rid of stocks really fast.

The first is the circle of confidence you encounter. I mean if I look at some pharma company or something, it’s gone. I don’t really need to look beyond the name, it’s gone. The second is that if I think I have some understanding of the business, then I look very quickly at the market cap, earnings, just some thumb metrics on valuation. I’m talking about less than 60 seconds—and once I see that it’s not at a p/e of one, it’s gone as well. I treat most new pitches the same way, whether it’s tech, retail, or even bookmakers not on Gamstop showing up in some small-cap portfolio where they don’t belong.

Basically we want to, or at least I want to, get rid of investment ideas for the flimsiest reasons as quickly as possible. Let’s say some some stock is really cheap, it appears to be within my circle of competence, then for one minute I’ll go to five minutes. I’ll give it five minutes and again to find something where I can just get rid of it. If I cannot get rid of it in five minutes then I’ll give it 15 minutes. All these exercises are designed to get rid of the stock as soon as possible and the inversion of that is that I’m only looking for… if I can find two or three ideas in a year I’m done.

You can watch the entire interview here:

(Source: YouTube)