This chapter stresses the importance of only purchasing investments with a healthy margin of safety. Once again, Pabrai quotes Buffett to back up this point:
"Make sure that you are buying a business for way less than you think it is conservatively worth."
Pabrai also refers to the writings of Ben Graham in The Intelligent Investor (which we've summarized here) by pointing out that Graham discussed the following joint benefits of employing a margin of safety: lower downside risk, and higher upside potential.
The entrepreneurs described at the beginning of Pabrai's book had likely never read the writings of Graham. Nevertheless, it is clear to Pabrai that their decisions were always taken with the idea of risk minimization in mind. Business schools, on the other hand, teach that reward comes from risk, and do a great disservice to their students, Pabrai argues.
The idea that higher rewards can only be achieved through higher risk is a common argument made by those who believe that the market is efficient, and therefore that it does no good to look for low-risk, high-reward situations. On this topic, Pabrai quotes Buffett again:
"We are enormously indebted to those academics: what could be more advantageous in an intellectual contest - whether it be bridge, chess, or stock selection than to have opponents who have been taught that thinking is a waste of energy?"