Mohnish Pabrai is an Indian-American businessman, investor, and philanthropist. He sold his company TransTech in 2000 for $20 Mn. He is known in the startup world for his books ‘Mosaic’ and ‘The Dhandho Investor: The Low-Risk Value Method to High Returns.’
A self-professed ‘cloner’ of Warren Buffett and Charlie Munger, here are 10 rules of success from Pabrai himself:
Minimise Risk
People think that entrepreneurs get rewarded because they take risks. But in reality, they do everything they can to minimise risk. “They want free lunches. So, if you study any number of entrepreneurs, you will find that they have repeatedly made low risk bets, which have high return possibilities.”
Define Your Market
If you look at any market, there will typically be three or four players at the most that control 80% of that market. If you enter the market with a notion to capture say 10 % of it, it would imply that you have not segmented your market well. “The approach should be – How do I acquire 60% of the market, and for that you need to first define your market and have a clear cut game plan.”
Stay Within Your Circle Of Competence
No one is a master of everything, and there are only few things that we understand properly. You should therefore invest only in things that you understand fully. As quoted by Pabrai, the investor John Arrillaga has made about $400 Mn by only investing in commercial real estate within four to five blocks of Stanford University.
Don’t Sell What You Wouldn’t Buy
Do not try to sell something that you wouldn’t buy yourself. The product you are pitching to the investors should be compelling enough that you yourself is deeply interested in buying it.
Wait For The Right Pitch
From an investor’s perspective, putting money in any startup to gain by just buying and selling stocks, is not a viable business. So, the single biggest advantage a value investor has is not IQ, but his patience and waiting for the right pitch. Being a startup, you should aim for adding that extra element to the pitch, making your investors think beyond financial.
Put Yourself In The Shoes Of Successful Entrepreneurs
When you look at businesses like Microsoft, Google, etc., you really have to put yourself in the shoes of people running these companies and ask yourself, how they are doing this. Most founders and CEOs are working with 3-5 variables, and once an investor touched those points, he would extrapolate whether it is underpriced or fairly priced.
Focus On Marketing
“I do not consider myself as a good salesman, but a pretty strong marketing person.” Without good marketing sales can grow as well as fall, however, if you have done your marketing homework, you can be a leopard and make sales. “Otherwise, you will spend 50x more time on sales, and hit your head hard against a brick wall.”
Create A Competitive Advantage
It’s the ability of the business to have some type of enduring competitive advantage that allows it to earn a better than average rate of return, over an extended period of time. Some businesses have narrow moats and some have broad moats. Some have moats that are deep but get filled up pretty quickly. “So, what you want is a business that has a deep moat with lots of piranha in it and that’s getting deeper by the day. That’s a great business”
Have Flexibility
It’s very important to be a learning machine and to have flexibility. You must be willing to look at the opportunity set and decide whether you need to do nothing at all or what is the best thing you can do to cash in on the available opportunities.
Pay Attention To Feedback
Let’s say that you have come up with a compelling value proposition. But the real litmus test happens when you put it in front of customers. The most important thing an entrepreneur want to do then is to pay close attention to feedback from the people listening to the pitch. “Because it’s probably the case that whatever you came up with is off-base. It’s not exactly what your market wants.”
