Mohnish Pabrai: 7 Questions To Answer Before Entering The Stock Market Chakravyuh

In his book The Dhando Investor, Mohnish Pabrai provides seven questions that investors must answer before entering the stock market chakravyuh. Here’s an excerpt from the book:

Abhimanyu’s dilemma on that 13th day of battle has close parallels to the decisions confronting equity investors every day. The decision to enter, traverse, and finally exit a chakravyuh is akin to figuring out when to buy, hold, and sell a given stock. The lesson Abhimanyu has for us is to have a crystal-clear exit plan before we ever think about buying a stock

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.

You can find a copy of the book here:

Mohnish Pabrai – The Dhando Investor