How Deep Should You Research a Stock?
This article discusses the depth of research required before making investment decisions, using Monish Pabrai's portfolio as an example and outlining a tiered research approach. It addresses a commenter's observation about the analysis quality and emphasizes the importance of balancing thoroughness with efficiency.
Analyzing Monish Pabrai's Portfolio
The article uses examples from Monish Pabrai's portfolio to illustrate the research process. The focus is on quickly assessing potential risks and rewards before committing to deeper analysis.
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Risk Adeleeves (Indian Company): The emerging market risk and inability to invest in India at current valuations led to a quick "no."
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Turkey (Dev Airports): Despite a potentially great business, the required 8% dividend yield plus growth wasn't met.
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Coal: While agreeing with Pabrai's thesis, the author already had diversified exposure and cheaper options.
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Mongolia (Turquoise Hill): Past experiences with government interference made further research unnecessary.
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US Homebuilders: Concerns about the US housing market's stability outweigh the 10% buyback yield.
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Valaris: While Pabrai was correct, it didn't align with the author's investment style.
The Importance of Value and Margin of Safety
The author emphasizes searching for investments with a strong margin of safety. These opportunities have characteristics like a low P/E ratio, high return on equity, and the ability to buy at a discount to book value. They also look for growth potential. The ideal investment should meet all these criteria, prompting deeper research.
The Pyramid of Research
The author outlines a structured research process visualized as a pyramid:
- Base: Initial review of numerous companies (dozens in six days). This includes companies that do not get a video made about them.
- Covered Stocks: Promising companies move to a research platform (about 25 properly, 50 in the shadows) for further learning.
- Diversified Portfolio: Interesting stocks from the covered list enter a diversified portfolio (19 positions).
- Model Portfolio: The best from the diversified portfolio go into a model portfolio (nine positions).
- Personal Portfolio: Only the very best, high-conviction investments are added to the personal portfolio (one position currently).
Deeper research is conducted only when a company progresses further up the pyramid.
Superficial Analysis as a Tool
The article defends the use of "superficial analysis" to quickly eliminate unsuitable investment ideas, echoing Monish Pabrai's strategy. This allows for focusing time and resources on truly promising opportunities. The goal is to identify and manage potential risks and find undervalued opportunities with strong growth potential.