Competing In The Age Of AI


Advice on Buying a Business

This is a repetition of material from the last post.I just think the matter is important enough to merit a post by itself.This is Mohnish Pabrai’s list of to-dos when buying a business.By paying attention to the following 9 principles of the Dhandho Framework you ensure that you bear the least risk and have the highest chance of a big pay-off.Of course, buying shares is buying parts of a business so you can apply the same criteria to come out ahead.

  1. Buy an existing business: you get a defined business model and have to invent nothing new.
  2. Buy businesses in simple industries with a low rate of change: buy businesses that are necessary and not about to be replaced any time soon.
  3. Buy distressed businesses in distressed industries: the very best time to buy a business is when it is hated and unloved.
  4. Buy businesses with a durable competitive advantage: this advantage can come from being low-cost to having a brand to having captive customers.
  5. Bet heavily when the odds are in your favour: if you must, wait for several years till the right opportunity comes by, then invest big-time.
  6. Focus on arbitrage: exploit any discrepancy between price and value.
  7. Buy businesses at big discounts to their intrinsic values: the odds of a permanent loss are low when this approach is followed.
  8. Look for low-risk, high-uncertainty businesses: the uncertainty leads to severely depressed prices.
  9. It’s better to be a copycat than an innovator: “innovation is a crapshoot, but scaling carries far lower risk.”
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