Mohnish Pabrai – Types of businesses.
Understandable this is not a book, however I strongly believe what Mr. Pabrai briefly discusses here is paramount to all investors, in understanding the different categories businesses can be classified within.
1. Businesses with extremely wide&deep moats
- These are the businesses ‘Idiots’ can run as their economics are so good.
- Usually fair priced businesses, not ultimate bargains.
- Typically have high Returns on equity and minimal debt.
- World Wide Examples: Coca-Cola, Visa, Moody’s, American Express, HSBC, British American Tabacco, Beer companies and others similar.
2. Businesses with deep moats, BUT require competent management
- These businesses are extremely similar as the previous category, however they do require competent management.
- World Wide Examples: Amazon, Costco, GIECO, Restaurants companies, Hotel chains.
3. Businesses with uncertainty, but not necessarily risky
- Generally these sorts of businesses are where the market gets confused between uncertainty and actual risk.
- For instance, a business with many warrants with undisclosed values will create uncertainty as to there value, however the market may presume this as risk.
- World Wide Examples: Fiat and other automobile companies.
4. Businesses with special situations
- These businesses on the face of them look extremely risky.
- However, Investors can train themselves to view these companies differently and potentially find gold.
- Examples: Companies going bankrupt, likely to be acquired and similar situations.
- Benjamin Graham supplies the most detailed explaintions of such situations in his book Security analysis.
5. Businesses with upside and little downside
- Quite self explanatory
- Mr. Pabrai’s example was his past holding in Sillicon Vally Bank, you can watch his explanation here. (Strongly advised)