Mohnish Pabrai has taught us that one of our job as investors is to reject ideas as quickly as possible. You do that by asking yourself if the business in front of you is in your circle of competence, and then if the answer is yes, then ask yourself if there is potential with the price or if it is obviously fully valued. If the company is not in your circle of competence, quickly pass. And when the company is in your circle of competence, if the business is obviously fully valued, quickly pass. This process can take as little as 30 seconds. And that’s a great thing because finding an investable idea is rare, so we want to move on from the non-investable as quickly as possible.
And generally this two-step checklist process works. I’m able to pass on many companies within one minute. But sometimes I get sucked in. Sometimes I end up spending hours and hours looking into companies that I am never going to invest in, and at a gut level, I probably know that the whole time. Why do I get sucked in? It’s usually because I stretch and try to make the idea seems more attractive than it is, because I am biased towards action as a human being, and also because I find business generally so interesting that often times I find the process of learning about new businesses very interesting.
Time is of the essence.
But time is not a luxury I have these days. I am not yet a gentleman of leisure. Rather, these days I am a gentleman of family and work, two things I must do a great job at, and I’m trying to be a Superinvestor on the side. It is possible to accomplish this, but I must protect my time and use it as efficiently as possible, and going down multi-hour, and sometimes multi-day, research projects on so-so investment ideas is just not something I can allow myself to do anymore. These jaunts down the path of over-extensive research into mediocre ideas hurt my investing results, and they take time away from my top three priorities in life: family, health, and work.
So I have been needing to tighten up my stock investment research process, and a recent talk from Mohnish Pabrai and a story he told about Charlie Munger has given me the tools to refine my research checklist and avoid wasting time on anything less than great ideas.
Mohnish talked about Munger’s use of the word “cinch.” And how this has led to a new checklist item for him in the moat section of his checklist, “it is a cinch?” I’m going to use this cinch question as a way to help me quickly move on from stock ideas during the initial research process.
My new 4 step new stock research checklist is:
1. Is it in my circle of competence? (estimated time = 30 seconds)
2. Is the price too expensive? (estimated time = 30 seconds)
3. Is it a “cinch?”
4. If not a cinch, is it at least so cheap it could be a low risk, huge upside opportunity?
If a company gets past my first two items, then I’ll spend a minute or two thinking deeply about whether or not the idea is a cinch. For example, I just wasted many hours over the last two days looking into a gold company in Alaska that has yet to produce an ounce of gold and is over a year or two away from being able to do that. This is not a cinch. Sure, everything could go great and they could produce enough gold over the next eight years to make their current stock price reasonable, and they could even end up finding massive amounts of gold on the rest of their mostly unexplored acreage. And it could end up being a 20 bagger. But this is far from a cinch. A lot could go wrong, that is obvious, and instead of spending the last day trying to make this idea attractive and rationalize the additional time spent looking into it, I could have just said “nope, not a cinch” at the two minute mark and moved on.
If something does look like it could be a cinch, then I’ll continue my research for another few minutes, come to more filter points, and so on.
And if something is not a cinch, then I’ll get to checklist item number four, and I’ll ask myself, “despite this not being a cinch, is it so cheap that it could be a low risk, huge reward opportunity?” And if it’s not cheap like that I’ll move on, and if it is that cheap, I’ll spend another few minutes on it, come to more filter points, and continue to decide if I should allocate another few minutes or move on.
Using my time wisely.
It’s not the worst thing in the world to spend time researching businesses that I’m not going to end up investing in, as you can learn a lot and I do find the process and field of studying businesses interesting in general. However, given the current phase of life that I’m in, where I’m primarily a father and a businessman who is trying to use the small amount of free time that I have to become a Superinvestor, I need to use my time as wisely as possible, and when it comes to deep dive research time, I can only afford to do that when there’s a real potential that I will end up investing in a cinch or a company that is so cheap that the risk/reward equation is undeniably attractive. And this new four item research checklist will help me accomplish that.
Once again, thank you Mohnish and thank you Charlie. How lucky are we that these Superinvestors share these nuggets of wisdom with us?