Mohnish Pabrai: Don’t Sell Overvalued Businesses: Give Them the Benefit of the Doubt

During this Q&A session at the University of Notre Dame, Mohnish Pabrai recommends selling a business only when it is obviously overvalued. Even if a business looks to be overvalued by 20-30%, it is worth giving it the benefit of the doubt, as there are many unknowns that could work in your favor. This is especially true with businesses that have gifted management teams. Here’s an excerpt from the session:

Pabrai: Basically I would say that the idea should be that when it’s very clear that a business is egregiously overvalued, absolutely you should sell it.

But if you’re just this is more kind of I think art and science when you get past what you think is fair value and something looks like it’s 20 30% overvalued or something I think you have to give benefit of doubt.

Because there are so many unknowns that could work in your favor and this is especially the case with gifted management teams.

I mean at what point in Microsoft’s something like 48 year history or maybe even 40 year history or so as a public company. At what point should it have been sold? Right.

I mean we know that we hit that point around 2000 and when it was like 600 billion, second most valuable business on the planet or something, but if you exclude that one bubble which everything became crazy a lot of things deserve to be sold.

Is Microsoft overvalued today? Is it egregiously overvalued? I mean I don’t know whether Microsoft is fairly priced or overpriced is probably somewhere in that kind of range, but I wouldn’t venture to say it’s egregiously overpriced.

So I would say that the egregious overpricing becomes obvious when it’s happening and one can act on that but I think you need to give it a lot of rope.

The other thing to keep in mind is that it’s always good to think of it as if you’re the owner of the business, the founder of the business.

So would a founder sell his company because they got an offer which was 20, 30% more than what they thought the business was worth.

And if it’s got a runway and all those things that’s probably unlikely.

If they got an offer of 500% of what they thought the business was worth they’d be very happy to sell. And so I think having a founder mindset is also very useful.

You can watch the entire discussion here: