How to Analyze Stocks Quickly | 2 Minute Business Analysis | Mohnish Pabrai | Investment
Summary
TLDRThe speaker emphasizes the importance of quickly identifying businesses with potential for investment, focusing on those within one's circle of competence. They discuss their aversion to industries like healthcare and pharmaceuticals due to their complex market dynamics. The speaker shares personal investment experiences, highlighting how certain triggers, such as a low price-to-earnings ratio or a unique business model, can pique their interest. They recount specific instances, like the undervalued funeral services industry and the post-financial crisis auto industry, where they spotted opportunities. The speaker also admits to missing out on successful businesses like Starbucks and Chipotle, illustrating the challenges of recognizing all promising investments.
Takeaways
- 🕵️♂️ The speaker evaluates numerous businesses but quickly dismisses most due to a lack of 'moat,' growth, or durability.
- ⏰ They spend minimal time on businesses that are outside their area of expertise or don't align with market forces.
- 🚫 The speaker avoids investing in sectors like pharmaceuticals and health insurance due to complexity and non-market-driven operations.
- 🔍 They focus on a select few businesses that pique their interest, often due to certain triggers in the first five minutes of evaluation.
- 💡 Warren Buffett's philosophy is mentioned, emphasizing that there's no penalty for passing on an investment, only for making a bad one.
- 📈 The speaker looks for businesses with low price-to-earnings (P/E) ratios as an initial trigger for deeper analysis.
- 💼 An example given is the funeral services industry, which has stable, recurring revenue and is not easily disrupted by new entrants.
- 🚗 Another example is the auto industry, particularly after the 2009 financial crisis, where certain companies were undervalued despite improvements.
- 🌟 The speaker acknowledges missing out on great businesses like Starbucks and Chipotle due to perceived high valuations or inaction.
- 💡 The importance of life experience and intuition in recognizing business potential is highlighted, as well as the need for a deep understanding of the business model.
Q & A
What is the speaker's approach to quickly dismissing businesses during his review process?
-The speaker dismisses businesses quickly if they lack a moat, growth, or durability, or if they are outside his circle of competence. He also dismisses them quickly if he doesn't understand them.
Why does the speaker avoid investing in pharmaceutical and health insurance companies?
-The speaker avoids investing in pharmaceutical and health insurance companies because he believes that the US healthcare system does not operate with market forces, and health insurance companies do not operate on market principles.
What does the speaker mean when he refers to 'no call strikes' in investing?
-The speaker means that unlike in baseball, in investing, there is no penalty for passing on an opportunity. The penalty comes from making a bad investment, not from missing out on a good one.
What triggers the speaker to look deeper into a business?
-The speaker is triggered to look deeper into a business when he sees something that quickly grabs his attention, such as a low price-to-earnings (PE) ratio, a stable and recurring revenue stream, or a business model that he finds intriguing based on his life experience.
Can you provide an example of a business that caught the speaker's attention due to its low PE ratio?
-An example of a business that caught the speaker's attention due to its low PE ratio was a funeral services company with a PE of two. He found it intriguing because the industry is stable, has recurring revenue, and faces less competition.
What factors made the funeral services industry attractive to the speaker?
-The funeral services industry was attractive due to its stability, recurring revenue, lack of competition from new entrants, and tradition-based customer loyalty. Additionally, the industry had undergone a consolidation that left some companies overleveraged and undervalued.
Why did the speaker find the auto industry interesting in 2012?
-The speaker found the auto industry interesting in 2012 because companies like Fiat Chrysler were trading at a very low valuation relative to their revenues, and the industry had undergone positive changes post-financial crisis that made the businesses more attractive.
What is the speaker's view on the business model of Starbucks?
-The speaker views Starbucks as an incredible business with a strong demand for its product based on convenience. He marvels at the company's ability to open new stores close to existing ones without cannibalizing the sales of the original stores.
Why did the speaker never invest in Starbucks despite recognizing its business strength?
-The speaker never invested in Starbucks because he always thought it was expensive, and he was content with observing the business from the outside rather than actively participating as an investor.
What lesson does the speaker share about missed investment opportunities?
-The speaker shares that he has missed out on many great investment opportunities, such as Chipotle and Starbucks, due to not acting on his observations and analysis, highlighting the importance of taking action when identifying a strong business.
Outlines
🔍 Investing Insights: Quick Elimination and Deep Dives
The speaker discusses their process of evaluating hundreds of businesses annually, quickly dismissing most due to lack of potential, growth, or durability. They emphasize the importance of understanding a business within their circle of competence, avoiding sectors like pharmaceuticals and health insurance due to complexity or market forces. The speaker also highlights the significance of not being penalized for passing on investments, unlike in sports, and focuses on finding businesses that grab attention within the first five minutes of evaluation. They mention using value line's list of stocks with the lowest price-to-earnings (PE) ratios as a trigger to investigate further, sharing a past experience with funeral service companies that had low PEs and stable, recession-resistant business models.
🚗 Auto Industry Analysis and Market Opportunities
In this paragraph, the speaker recounts their experience with the auto industry, particularly focusing on General Motors (GM) and Fiat Chrysler. They were initially drawn to these companies due to the low market valuation relative to revenue, which was a result of the financial crisis in 2009. The speaker notes the positive changes in the auto industry post-crisis, such as the elimination of non-essential operations, which improved the business model. They also reflect on missed opportunities, such as not investing in Starbucks and Chipotle despite recognizing their strong business models and customer demand. The speaker marvels at Starbucks' ability to quickly recoup investment in new stores and Chipotle's enduring success, indicating a pattern of underestimating the potential of consumer-driven businesses.
Mindmap
Keywords
💡Competence
💡Market Forces
💡Growth
💡Durability
💡Price to Earnings Ratio (PE Ratio)
💡Recurrence
💡Leverage
💡Auto Industry
💡Financial Crisis
💡Starbucks
💡Chipotle
Highlights
The speaker evaluates hundreds of businesses annually but spends minimal time on most due to their lack of potential, growth, or durability.
Quick elimination of companies is often due to a lack of understanding or because they fall outside the speaker's area of expertise.
Pharmaceuticals and healthcare businesses are disregarded due to the speaker's perception that they do not operate on market forces.
The speaker emphasizes the importance of focusing on a few businesses that are within their 'sweet spot' of understanding.
Buffett's philosophy is mentioned, highlighting that there are no 'strikes' in investing for missed opportunities, only penalties for bad investments.
The speaker discusses the value of being selective and not feeling obligated to invest in every promising business that crosses their path.
A low price-to-earnings (PE) ratio can be an initial trigger for the speaker to investigate a business further.
The speaker recalls an instance where two funeral services companies had a PE of two, which piqued their interest due to the industry's stability and lack of competition.
Funeral services are highlighted as a business with recurring revenue, protection from new entrants, and tradition-based customer loyalty.
The speaker explains how industry consolidation and overleveraging led to an opportunity in the funeral services sector.
The speaker shares a strategy of looking at businesses with low valuations relative to their revenues, as seen with Fiat Chrysler.
Changes in the auto industry post-2009 financial crisis made it a more attractive sector for investment, according to the speaker.
The speaker admits to missing out on great businesses like Starbucks and Chipotle, despite recognizing their potential.
Starbucks' business model is praised for its quick return on investment and customer demand based on convenience.
The speaker reflects on their personal admiration for Chipotle and its strong business model, despite not investing in it.
Transcripts
I I look at hundreds and hundreds of
businesses every year but most of them I
probably spend less than maybe five
minutes on maybe two three minutes on I
spend very little time because it
becomes very obvious very quickly that
there's no there's no mo here or there's
no growth here or there's no durability
here so or a big reason to get rid of
companies quickly is I don't understand
them they're outside myself competence
so if I look at anything in
Pharmaceuticals it's gone before you can
blink your eyes anything in healthare I
I think US Health Care does not operate
with Market forces us Insurance health
insurance companies don't operate Market
FES so I'm not interested in those kinds
of businesses so large swats of
businesses just go away because they're
just not in The Sweet Spot of what I
would understand I I look at a a large
number of businesses every year but I I
spend most of my time on very few
businesses what
gets your attention in those first five
minutes is there anything that comes to
mind it's like I look at a business and
I want to look into this deeper is there
anything or is it a six s that you've
built up over the years you just say
there's something there I want to look
into it or is there anything any
criteria looking at and like
price to earnings ratio or any stock
price growth something like that where
you say let's s
deeper well I mean I think for different
businesses different things can trigger
you so first of all one of the things
that Buffett says is unlock unlike
baseball in investing there are no call
strikes and so what that means is that
if Amazon crosses my desk at $10 a share
maybe you know 18 years ago or 20 years
ago and I'm too dense to figure it out
and I let it go I don't pay a penalty
for that uh what I pay a penalty for is
if I make an investment in pets.com and
it doesn't work so that's where you pay
the penalty is if you actually make the
bet not when you take a pass so we can
be somewhat
sloppy in what
we select versus not don't select
especially in terms of Letting Go some
great businesses that happens a lot with
me I'm sure there are lots and lots of
businesses I look at which are very
awesome businesses but I cannot see it
uh so what I'm looking for is something
really quickly that grabs my attention
maybe I would say I would say maybe a
couple of decades ago I saw that in
value line one of the Cross sections of
or you know list of stocks they have is
stocks with the lowest pees so they they
follow 1,700 stocks they list like 4050
stocks we have the lowest pees and
usually I scan those lists very quickly
every week and they don't change that
much week to week but you know the most
businesses are there with PS of two and
three and four for very good reasons
they don't make sense but I remember I
saw about 20 years ago that there were
two funeral services companies that were
sitting at a PE of two I thought in my
head that funeral services is a very
stable business it's recurring Revenue
in the sense that we we know that a
certain number of people will die every
year in the United States we don't know
who's going to die but we know how many
are going to die and the other thing is
that it's a protected business 21 year
olds don't go into the business World
saying I'm going to open a funeral
services business and it's also a
tradition bar so when you're looking to
have your last rights done you're
looking for a place that has been around
for a while and you're also looking for
the service to be done properly so you
don't go shopping for the low
bed okay so you don't like you know when
your uncle Steve has died you don't call
six places and get the lowest price and
then say okay that's where we're going
to have the service unless Uncle Steve
was real
you
know you don't want to go to the lowc
cost provider and go to you might then
pick a cardboard box for him or
something you know so but you're
generally going to not want to do those
kinds of things yeah so so these
businesses generally have good margins
they don't face much competition and
what had happened in the US a while back
maybe about 25 30 years ago was there
had been a massive roll up in the in the
funeral services industry so they were
all Mom and Pops all over the world all
over the place and these two large two
or three large companies came in and
they bought them all they kept the same
names and everything but they were owned
by you know these two or three players
and these players got overleveraged and
then the music stopped and then their
stocks went into tail spins and that's
when I was looking at them so they they
had a lot of Leverage a lot of debt but
the uh on a pure kind of free cash flow
basis they were sitting at two times
earnings so I looked at I I said okay
there is a lot of debt can the debt be
managed so I got intrigued because the
PE was showing two and it said funeral
services right so that was a trigger to
dig further right and eventually I made
the investment and it worked worked
really well so there are different
triggers you know another time I think
in 2012 I was looking at the auto
industry and I had first looked at GM
because couple of guys had bought it and
I was trying to understand why they
would buy such such a crappy business
and I I was then looking at Fiat
Chrysler and I noticed that their
revenues were 140 billion and the market
cap was 5 billion so they were you know
they were trading at like you know 3% 4%
of Revenue and there were a number of
things that had happened in the auto
business in 2009 after the financial
crisis which actually made the business
really good because they got rid of a
lot of the nonsense so that was another
where the valuation was so cheap and a
lot of the things that people hated
about the business had actually changed
so basically what you you know there are
some things we understand and based on
this
understanding we can look at businesses
and sometimes uh with our life with our
life experience when we look at a
business we might say oh I I see
something here and I should look at it
but I've also missed so many like I mean
to give you an example every time I go
into a Starbucks okay I just marvel I
Marvel at the incredible business it is
so when they open a Starbucks store it
takes them like 18 to 24 months to get
all their money back okay so you open a
store and and in outside the US they get
it back in a year okay so the
International Starbucks and the other
thing that I've known for a long time
and they did this in New York City was
you have a Starbucks in a particular
intersection you open another one
diagonal from that
intersection no change in the store
sales of the original one you open a
third one there's still no change so the
demand the demand for Starbucks Coffee
relates to the
convenience you know so so we don't even
know where that end point is and you
know I mean you know you take milk and
coffee and whatever and you're charging
four or $5000 for it most of it is
carried out they don't even they're not
even in the store they're not using your
facilities not using your Wi-Fi so a few
people are in the store kind of gives
the atmosphere but just it's an
incredible business okay and I always
looked at it all thought it was
expensive never bought it and it just
keeps going you know and I've been you
know a big big fan of Chipotle for a
long time I mean I think probably 20
years I've been customer of Chipotle
right and I knew 20 years ago it was a
great business and again you know
just watching you know grazing my Naval
instead of doing something and uh what
an incredible business
[Music]
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