Mohnish Pabrai

Advice on Buying a Business

March 6, 2011 Leave a comment

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.

Buy an existing business: you get a defined business model and have to invent nothing new.
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.
Buy distressed businesses in distressed industries: the very best time to buy a business is when it is hated and unloved.
Buy businesses with a durable competitive advantage: this advantage can come from being low-cost to having a brand to having captive customers.
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.
Focus on arbitrage: exploit any discrepancy between price and value.
Buy businesses at big discounts to their intrinsic values: the odds of a permanent loss are low when this approach is followed.
Look for low-risk, high-uncertainty businesses: the uncertainty leads to severely depressed prices.
It’s better to be a copycat than an innovator: “innovation is a crapshoot, but scaling carries far lower risk.”

Filed under Entrepreneurship, Paper Assets, Tool Kit Tagged with 9 Principles of the Dhandho Framework, arbitrage, bet heavily, business with low rate of change, buy an existing business, buying a business, copycat, distressed business, distressed industry, durable competitive advantage, Entrepreneurship, innovator, low risk high uncertainity, Mohnish Pabrai, postaday2011, RandomBlog2011

March 6, 2011 1 Comment

Mohnish Pabrai is an Indian-American businessman and deep value investor.He is the managing partner of the Pabrai Investment Funds, which he founded in 1999.He is also a member of the Young President’s Organization (YPO) and a charter member of The Indus Entrepreneurs (TIE).

Monhnish Pabrai first trained as a computer engineer. He then spent nearly two decades in the tech field.In 1990, he quit his job working as an engineer for Tellabs in Chicago and abandoned his master’s thesis at the Illinois Institute of Technology to launch TransTech, an IT consulting and systems integration company, which he funded with $30,000 from his retirement account and $70,000 from credit cards.His father encouraged him in the endeavour,saying that it was the right thing to do as staying at Tellabs and following the staid boring corporate path was high risk. Starting a business on the other hand was low risk, could give high returns and high adventure. As Monaish was single at the time there were few complications and in the worst case, he would lose everything ,which wasn’t much anyway,and could declare personal bankruptcy and start over. By 1999, Transtech, which had grown to 200 employees and $30 million in revenues, held no thrill. So he sold it. And during the tech boom,he started another company, internet incubator Digital Disrupters, which had a very painful and swift demise due the tightening of capital markets .In 2000, he sold TransTech to Kurt Salmon Associates.During late 1999, with nine other investors contributing $100,000 each,Mohnish started Pabrai Funds with $1,000,000 in assets. Pabrai Funds was modelled on the original “Buffett Partnership.” Read more of this post