“Good checklists, on the other hand are precise. They are efficient, to the point, and easy to use even in the most difficult situations. They do not try to spell out everything–a checklist cannot fly a plane. Instead, they provide reminders of only the most critical and important steps–the ones that even the highly skilled professional using them could miss. Good checklists are, above all, practical.” ―Atul Gawande,
The Dhandho Investor: The Low-Risk Value Method to High Returns, written by Mohnish Pabrai, was released in 2007. Over at Amazon the book is described as “A comprehensive value investing framework for the individual investor. In a straightforward and accessible manner, The Dhandho Investor lays out the powerful framework of value investing.” I read the book back when it was released, and it’s a decent book.
But anyways, except for that, I scrolled though the book yesterday, and in the end Pabrai sums up a few questions for the investor to ask before consider buying into a business. These seven questions could be compared to Warren Buffett’s own four checklist questions that he wrote about in his 1977 letter to shareholders―see end of post.
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.
In essence, the questions above from Pabrai’s book are pretty much another way of saying the same thing as Warren Buffett did back in 1977 in his letter to shareholders:
“We select our marketable equity securities in much the same way we would evaluate a business for acquisition in its entirety. We want the business to be (1) one that we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive price. We ordinarily make no attempt to buy equities for anticipated favorable stock price behavior in the short term. In fact, if their business experience continues to satisfy us, we welcome lower market prices of stocks we own as an opportunity to acquire even more of a good thing at a better price.”
As Pabrai, you should keep learning from the ones before you that you look up to as role modes. Bring to you all their wisdom and thinking that’s worth carrying on your own journey. Be it about life itself, value investing or any other endeavor. The most important thing is to never stop learning.
“A man may die, nations may rise and fall, but an idea lives on. Ideas have endurance without death.” ―John F. Kennedy
Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company or individual mentioned in this article. I have no positions in any stocks mentioned.