How to Analyze Stocks Quickly | 2 Minute Business Analysis | Mohnish Pabrai | Investment

Summary

The 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.