This is an extension of part 1.
Part 2
Rule 4: Don’t Engage In Short-Selling
“Why would you want to take a bet where your maximum upside is double & your maximum downside is bankruptcy? It never made any sense to me. So, why go there?”
Mohnis Pabrai
Rule 5: Low Risk, High Uncertainty
“I think the low-risk high uncertainty is something I borrowed from entrepreneurs, Patel’s in India or Richard Branson of the world. If you study entrepreneurs there is a misnomer, people think that entrepreneurs take risks & they get rewarded because they take risks. In reality, entrepreneurs do everything they can to minimize the risk. They are not interested in taking risks. They want free lunches & they go after free lunches. If you study any number of entrepreneurs what you’ll find is that they’ve repeatedly made bets which are low-risk bets, which have high return possibilities. They’re not going high risk-high return.”
Mohnis Pabrai
“When I’m looking at investment I now look at it the way I looked at my first business. The first thing I’m looking at is How can I Lose Money? Can I minimize my downside? The upside will take care of themselves. It’s the downside that one needs to worry about, which is why even the checklist becomes important. The important thing that value investors focus on is downside protection. That is the I would say the crossover between entrepreneurship & value investing.”
Mohnis Pabrai
Rule 6: Have a Checklist
“the checklist I have currently has about 80 items on it. Even though 80 sounds a lot it doesn’t take a long time. It takes about 30 minutes to go through the checklist. What I do is when I’m starting a business, I go through my normal process of analyzing the business. When I’m fully done & I’m ready to pull the trigger, I take the business through the checklist. I run it against the 80 items. What happens the first time when I run it, if there might be 7 or 8 questions that I don’t know the answer to? Which is great. What that means is, listen, dummy, go find out the answer to the 8 questions first.”
Mohnish Pabrai
“Any business that I look at will have some items on which the checklist raises red flags. But the good news is that you’re looking in front of you with all your facilities at the range of things that could cause a problem. When you look at that list you can also compare it to how those factors correlate with the rest of your portfolio.”
Mohnish Pabrai
