In his book – The Dhandho Investor, Mohnish Pabrai outlines seven key questions that investors should address before buying a stock. He emphasizes understanding the business deeply, accurately estimating its intrinsic value over time, ensuring it’s priced at a significant discount (over 50%), and being comfortable investing a large portion of one’s net worth.
Pabrai also stresses minimal downside risk, a strong competitive moat, and management’s capability and honesty. He advises that all criteria must be met to proceed with an investment. If not, one should wait for a better opportunity, as entering without full confidence is risky.
Here’s an excerpt from the book:
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:
- Is it a business I understand very well—squarely within my circle of competence?
- 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?
- Is the business priced at a large discount to its intrinsic value today and in two to three years? Over 50 percent?
- Would I be willing to invest a large part of my net worth into this business?
- Is the downside minimal?
- Does the business have a moat?
- 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:
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