In his recent interview with the Doctors Investing Group, Mohnish Pabrai discusses the one question you need to answer before you can value any business. Here’s an excerpt from the interview:
Pabrai: I think the first question one should focus on is whether the business is within your circle of competence you know.
So if I lived in Des Moines, Iowa and I had expertise in buying and selling apartments in Des Moines, Iowa then I would have a general sense of when something came up on the radar and the price of being offered at whether it was a good deal or not. Just because I could… I’d know how to run the numbers and the equity and the financing and the expenses and all of that and make a determination.
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So the first question is to ask yourself is the business within my circle of competence. The same Des Moines investor may have no expertise in London real estate for example, or even Florida real estate for example. There may be factors that come in that he may not be familiar with, or it may be very similar, we don’t know.
So first thing you need to satisfy yourself is that whatever business or stock or asset you’re looking at is something you understand, and if you understand it well then you know how to value it, and if you can value it then the next step is, is there a difference between the price is being offered and what you think it’s worth, and if there’s a large enough difference there then you would generally step in, and if it’s… if that difference is negative or minuscule then you just move on.
You can watch the entire discussion here:
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Article by The Acquirer’s Multiple
