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)

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