How 15 to 20 Minutes Can 'Clone' You into an Investing Great

In this issue:

» CPI and WPI move in different directions

» FIIs to make a comeback?

» ...and more!

• What's the difference between school and life? In school, you're taught a lesson and then given a test. In life, you're given a test that teaches you a lesson.

That was a daily message that all of us at Equitymaster received in our inboxes yesterday.

As someone always looking to link life with investing, the first thought that came to mind when I read that quote was Monish Pabrai's views on the importance of having checklists.

Mr Pabrai's take on investing cannot not be ignored. After all, he's outperformed the S&P 500 index by 11x over a fifteen-year period. And if one reason had to be identified for his success, it would be his focus on process. What he calls 'checklist investing' is a process that takes him just 15 to 20 minutes to run through.

Mr Pabrai is an engineer by profession. He wasn't even aware of Warren Buffett until he was thirty. But there's been no looking back since. Mr Pabrai actually came into the limelight in 2008 when he paid US$650,000 to have lunch with Mr Buffett.

One thing Mr Pabrai is never too proud to harp on about is his 'cloning' of the investing greats. His view is that that it only makes sense to learn from them...and to take advantage of their shared knowledge. Over time, Mr Pabrai has grown his checklist of points for gauging the qualitative aspects of an investment idea.

The Equitymaster research team has had a few sessions on this subject where each analyst shared their key learnings from failed and successful past recommendations. Through this process, we have been able to develop an in-house checklist of our own. The checklists are especially helpful when we interact with managements.

Of course, the checklist continues to evolve. In fact, I recently added a point to the list: Is the company only able to prosper due to smart tax management? When we asked a management whether their company would be able to maintain its competitive edge once their tax advantages disappeared (which was expected to happen a year from then), the response we got was not satisfactory. This allowed us to keep the stock on watch mode.

The take-home point here is that investors should develop their own checklists. Here's how Mr Pabrai puts it:

• Our brains are designed to take shortcuts and arrive at answers quickly - when you see the lion, you run. You don't process your options, you just run.

• We are also a mix of rationality and emotions. When we notice a great business is undervalued, we read up on it, run through a number of concerns and questions and arrive at a decision - not as effective as a checklist.

What are the key learnings from your past that are now part of your investment checklist? Let us know your comments or share your views in the Equitymaster Club.

2:25 Chart of the day

The bad news for the economy is that food inflation is back. The good news is that it seems to be limited to just one category for now, Pulses. Today's chart highlights the situation in food prices for the month of Nov 2015. The year-on-year rise across various categories puts thing in the right perspective.

Food and Beverages as a category have a weightage of 45.86% in the Consumer Price index (CPI). The CPI is closely analysed and is a preferred inflation targeting data point of the RBI. Thus, food inflation explains why the CPI has been trending upwards recently whereas the Wholesale Price Inflation (WPI) has remained in negative territory for quite some time.

CPI rises due to soaring pulses prices

The soaring prices of pulses are clearly responsible for the CPI rate of 5.41% in the month of Nov 2015. As per an article in the Business Line, prices of pulses were up a staggering 46.08% resulting in a contribution of 2.79% out of the overall 5.41%. The government's response was found wanting during the price spike last month. With the CPI getting close to the RBI's target of 6% for January 2016, it would put the central bank in a tricky position regarding interest rates. We believe, without food prices coming under control, it would be next to impossible for interest rates to fall significantly.

It is no secret that Foreign Investors rule Indian markets. Big moves made by FIIs result in wild price swings. It is no wonder that they are tracked closely. Thus, it came as no surprise to us when we came across an article in the Economic Times predicting yet another major move by FIIs.

In September 2015, when the markets hit a 52-week low, FIIs had covered their short positions aggressively. This caused a surge in the benchmark indices by about 10% in a month and a half. Thus, with the markets close to those levels yet again, could history repeat itself? Are the bears wrong? Will FIIs once again cover their shorts leading to sharp spike stock prices?

We confess that we don't have a special insight to FII behavior. It is true that during period of high pessimism, markets can surprise everyone in the upward due to short covering. However, we do not endorse trading on such speculation. As long-term investors, we encourage retail investors to not get carried away by FII activity.

At the time of writing, the Indian equity markets were trading flat with the Sensex up by about 19 points. Stocks from the mid and small cap segments were in demand as their representative indices were trading higher by about 0.2% and 0.3% respectively. While consumer durables and oil and gas stocks were favoured, those belonging to the power and telecom spaces were least in demand.

04.51 Today's investing Mantra

"Industries with rapid change are the enemy of the investor. Tech businesses, particularly biotech, is a problem from that point of view. All industries work with change, but you should ideally be investing in businesses with a low rate of change, not a high rate of change." - Mohnish Pabrai

This edition of The 5 Minute WrapUp is authored by Devanshu Sampat (Research Analyst).