In his book The Dhando Investor, Mohnish Pabrai provides seven questions that investors must answer before entering the stock market chakravyuh. Here’s an excerpt from the book:
Abhimanyu’s dilemma on that 13th day of battle has close parallels to the decisions confronting equity investors every day. The decision to enter, traverse, and finally exit a chakravyuh is akin to figuring out when to buy, hold, and sell a given stock. The lesson Abhimanyu has for us is to have a crystal-clear exit plan before we ever think about buying a stock
Much of this book has fixated on the various nuances of buying stocks. This is by no means a summary, but here are seven questions that an investor ought to be thinking about before entering any stock market chakravyuh:
1. Is it a business I understand very well—squarely within my circle of competence?
2. Do I know the intrinsic value of the business today and, with a high degree of confidence, how it is likely to change over the next few years?
3. Is the business priced at a large discount to its intrinsic value today and in two to three years? Over 50 percent?
4. Would I be willing to invest a large part of my net worth into this business?
5. Is the downside minimal?
6. Does the business have a moat?
7. Is it run by able and honest managers?
One should only consider buying if the answer to all seven is a resounding yes. If a well-understood business is offered to you at half or less than its underlying intrinsic value two to three years from now, with minimal downside risk, take it. If not, take a pass on entering this chakravyuh.
There will be better chances in the future.
You can find a copy of the book here:
Mohnish Pabrai – The Dhando Investor
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