Pabrai’s Dhandho Checklist: Seven Questions to Ask Before Buying

“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 Checklist Manifesto: How to Get Things Right

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.

TDI1TO ENTER OR NOT TO ENTER—THAT IS THE QUESTION

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.

Mohnish Pabrai’s Google Talk: “Dhandho. Heads I win; Tails I don’t lose much”

Explain Why it Makes Sense

“The most important thing is that, before you invest, you should be able to explain the thesis without a spreadsheet within four or five sentences. Typically I write down those sentences before I invest, so if I have a conversation with someone you could very quickly explain why this investment makes sense.” —Mohnish Pabrai, Google Talk July 21, 2014

Patience is the Single Most Important Skill

“Good traits, or important traits for being a good investor, number one the single most important skill is patience. So I think the thing is that markets have kind of a way of deceiving us, because you know when you turn on CNBC and you see all those flashing red and green lights and all that, its inducing the brain to think that you need to act now, and you need to act immediately. Nothing could be further from the truth.  You know Buffett always talks about having this punch card where in a lifetime you make twenty punches, and each time you buy a stock you punch it once so in a lifetime you’d make twenty investment decisions. Which means that if you started investing at twenty and ended at eighty, every three years on average you’d make one investment. And that is very hard for most people to do. And so, the more you can slow down your investing, and the more patient you can be, so the issue is that the time scales of which companies go through change and such, is very different from the time scales of which the stock market operates. So you really have to focus not so much on the stock market and have a lot more focus on the nature of change in businesses and be willing to be in there for a while.” —Mohnish Pabrai, Google Talk July 21, 2014


Mohnish Pabrai – Background

Pabrai worked with Tellabs between 1986–91, first in its high speed data networking group, and then in 1989, joined its international subsidiary, working in international marketing and sales.

In 1991 he started his IT consulting and systems integration company, TransTech, Inc. with about US$30,000 from his own 401K account and US$70,000 from credit card debt. He sold the company in 2000 to Kurt Salmon Associates for US$20 million. Today he is the managing partner of the Pabrai Investment Funds (a family of hedge funds inspired by Buffett Partnerships), which he founded in 1999. (Source: Wikipedia)

The Dhandho Investor: The Low-Risk Value Method to High Returns

The Google Talk, see video below, centers around the investment concepts discussed by Mohnish in his book the Dhandho Investor, that was published a few years back. Some of these concepts are, among others, the Dhandho concept of doing business, risk vs uncertainty, circle of competence and margin of safety.

Excerpt about the book from Amazon:

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. Written with the intelligent individual investor in mind, this comprehensive guide distills the Dhandho capital allocation framework of the business savvy Patels from India and presents how they can be applied successfully to the stock market. The Dhandho method expands on the groundbreaking principles of value investing expounded by Benjamin Graham, Warren Buffett, and Charlie Munger. Readers will be introduced to important value investing concepts such as “Heads, I win! Tails, I don’t lose that much!,” “Few Bets, Big Bets, Infrequent Bets,” Abhimanyu’s dilemma, and a detailed treatise on using the Kelly Formula to invest in undervalued stocks. Using a light, entertaining style, Pabrai lays out the Dhandho framework in an easy-to-use format. Any investor who adopts the framework is bound to improve on results and soundly beat the markets and most professionals.

Google Talk with Mohnish Pabrai

See video below for the brand new Google Talk (approximately 60 minutes) with Mohnish Pabrai from July 21, 2014. Enjoy.

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. This article is informational and is in my own personal opinion.