Hello friend, in today’s article we see how much it cost to buy an existing business from the book ” The Dhandho Investor” chapter 6 by author Mohnish Pabrai. In this chapter, the author explains that it’s better to buy an existing business than the Starting a new business.
so let’s understand the logic behind this
The Dhandho Investor:- Chapter 6 ( Buying an Existing Business)
In this chapter, the author explains that buying an existing business with the help of the stock market is way better than starting your own business. if you want to start a Value Investor career, then this chapter will change your life perspective to starting a business.
so let’s start with the author’s words,
the authors say, ” There are a plethora of asset classes you would choose to invest in – CDs U.S. Treasuries, Bonds, Stocks, Real estate, private businesses, gold, silver platinum, oil furniture. the list is endless.
If you examine returns from the Board of Stock Market indexes over the past one hundred years, it is pretty clear that stocks do better than virtually all other easily accessible asset classes.
the evidence overwhelmingly suggests that over the long haul, the best place to invest assets is in common stocks, let’s investigate this particular creation of mankind called the stock market.
The first stock market was formed in just 1790 in Philadelphia, followed by the new york stock exchange in 1972. A stock is seen by many as a cryptic piece of paper whose price wiggles around continuously, that’s one way to look at stocks. (How much does it cost to Buy an Existing Business By Mohnish Pabrai)
A far better way, suggested by Benjamin Graham, is to think of them as an ownership stake in an existing business. Papa Patel’s Motel is not publically traded on any stock exchange. if it were and you bought some of it, Now you and papa Patel are partners.”
then the author gives the Six big advantages of Stocks to buy the existing business that is traded on an exchange.
the author says, ” There are six big advantages that the stock market offers versus the buying and selling of an entire business.
- When you buy an entire business, as Papa Patel did, there is some serious heavy lifting required. you either need to run it or find someone competent who can this is no small task. Papa Patel did well but it required tremendous energy and dedication from his whole family for several years to make it work.
- When you buy a stock, you now have an ownership stake in the underlying business with a huge advantage- the business is already started and running. You can share in all the rewards of business ownership without much effort. the stock market enables you to own fractions of a few businesses of your choosing, over a period of your choosing with full liquidity to buy or sell that stake anytime with a few circles on Your computer. Humanity has given you a marvelous asset-compounding machine that’ is vastly superior to virtually all other alternatives and makes it all amazingly cheap and easy to use. Papa Patel does not have these advantages and we have a huge leg up on him with the stock market at our disposal. the key is to only participate in the stock market using the powerful Dhandho Investing Framework. (How much does it cost to Buy an Existing Business By Mohnish Pabrai)
- When humans buy or sell a whole business both sides have a good sense of what the asset is worth and a rational price is virtually arrived at. sometimes in these transactions, if the business or industry is distressed, buyers might get a bargain as papa Patel did, but those are anomalies. Sellers usually get to time these sales to their benefit. As a result, you typically end up with Fair to exuberant pricing. the stock market operates like the Pari-mutual in horse racing, the auction process occasionally leads to a wide divergence between the value of a business and its quoted market price in a few stocks. We can do very well by only placing an occasional bet when the odds are heavily in our favor. According to Charlie Munger:- If you stop to think about it, a pari-mutual system is a market everybody goes there and bets, and the odds change based on what’s bet. that’s what happens in the stock market.
- Buying an entire business- even a small/ neighborhood gas station or a laundromat- requires some serious capital. In the stock market, you can hitch your wagon to the future prospects of any business with what you have in your wallet right now. the ability to get started with a tiny pool of capital- and add to that pool over the year- is a huge advantage.
- There are thousands of publicly traded businesses in the united states, and you can buy a stake in any of them with a few mouse clicks. you can buy stocks in a plethora of other countries with ease as well. I’d estimate that the average individual investor could easily buy a stake in well over 100,000 businesses around the planet with a couple of brokerage accounts. In contrast, think about how many private businesses are on sale within 25 miles of your home, at any given time there is just no comparison.
- At the race track, the track owner takes 17% of every dollar bet. the frictional costs are very high. Even when you buy a tiny private business, transaction costs between the buyer and seller are usually between 5 percent to 10 percent of the purchase price which doesn’t include the considerable time and effort expended. You can buy and sell a stake in a publically traded company for under $10. with a $100,000 portfolio and even at a hyperactive 50 trades a year, frictional costs are 0.5% – and they keep getting lower ( as a percent) as the value of the portfolio rises over time.
ultra-low frictional costs are a huge business is the best path to building wealth. And with no heavy lifting required, bargain buying opportunities, ultra-low capital requirement, ultra-low frictional costs, buying stakes in a few publically traded existing businesses is the no-brainer Dhandho way to go.”
so you get the idea, the best way to make money or multiply money is to buy the existing business with a simple model with the help of the stock market.
so in the next chapter, we see which business we should invest in.
so this is all about how much does to buy a business existing business, from the book ” the dhandho Investor ” chapter 6
buy this book to learn more about value investing.
Read More articles, on Investing
Pingback: Intrinsic Value of Simple Businesses - The Marathi Investor