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.

Outlines

00:00

🔍 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.

05:01

🚗 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.

Keywords

💡Competence

Competence refers to the ability to do something successfully or efficiently. In the context of the video, it relates to the speaker's self-awareness of their own expertise and the areas they understand well enough to make informed investment decisions. The speaker mentions that they quickly discard businesses that are outside their competence, emphasizing the importance of sticking to what one knows and understands deeply.

💡Market Forces

Market forces are the mechanisms of supply and demand that determine the prices of goods and services in a free market. The speaker uses this term to explain why they avoid certain sectors, like healthcare and insurance, which they believe do not operate under typical market forces due to regulatory and structural factors. This highlights the speaker's strategy of investing in sectors where market dynamics are more transparent and predictable.

💡Growth

Growth in this context refers to the expansion of a business's operations, revenue, or market share. The speaker mentions that they quickly assess businesses for signs of growth, as it is a key indicator of potential investment value. Businesses that show no growth or potential for expansion are often discarded early in the speaker's evaluation process.

💡Durability

Durability in the video refers to the longevity and sustainability of a business's success over time. The speaker is looking for businesses that have a durable competitive advantage or market position, which can withstand changes in the market or economic conditions. This is a critical factor in the speaker's investment strategy, as it suggests the business is less likely to fail or become obsolete.

💡Price to Earnings Ratio (PE Ratio)

The Price to Earnings Ratio (PE Ratio) is a financial metric that compares a company's current share price to its per-share earnings. It is used to determine the relative value of a company's stock. In the video, the speaker recalls using low PE ratios as a trigger to investigate further into certain businesses, such as funeral services companies, which were trading at a PE of two. This indicates that the speaker uses financial ratios as part of their initial screening process for potential investments.

💡Recurrence

Recurrence in this context means the regular or repeated occurrence of an event or situation. The speaker uses the example of funeral services to illustrate a business with recurring demand, as deaths are a constant and predictable part of society. This type of business is attractive to investors because it offers a stable revenue stream, which is less susceptible to economic fluctuations.

💡Leverage

Leverage, in finance, refers to the use of borrowed money to increase the potential return of an investment. However, it also increases risk. The speaker mentions that the funeral services companies they were interested in had high leverage, meaning they had significant debt. The speaker had to assess whether this debt could be managed, indicating that leverage is a critical factor in evaluating the health and potential of a business.

💡Auto Industry

The auto industry is the sector of manufacturing that focuses on the production of automobiles. The speaker discusses their analysis of the auto industry, particularly Fiat Chrysler, as an example of a sector where they found undervalued companies. They mention that the company's market cap was a small percentage of its revenue, indicating a potential investment opportunity based on the speaker's valuation criteria.

💡Financial Crisis

A financial crisis is a situation where financial markets are unstable, causing a widespread loss of wealth. The speaker refers to the financial crisis of 2009 to explain how it led to positive changes in the auto industry, such as the elimination of inefficient practices. This context shows how external events can create investment opportunities by altering the dynamics of an industry.

💡Starbucks

Starbucks is used in the video as an example of a successful and enduring business model. The speaker admires the company's ability to quickly recoup its investment in new stores and its high customer demand, which is not significantly affected by the opening of additional nearby locations. This example illustrates the speaker's point about the importance of understanding the underlying drivers of a business's success when considering investments.

💡Chipotle

Chipotle is mentioned as another example of a business that the speaker recognized as having a strong and sustainable model but did not invest in at the time. The speaker's reflection on this serves as a reminder of the potential missed opportunities in investing and the importance of acting on one's convictions when identifying a good business.

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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