OK, that's not completely fair. After all, one of the goals at The Motley Fool is to help you become a better investor. And that's exactly what The Dhandho Investor by money manager Mohnish Pabrai can do. But be forewarned: Pabrai gives us the recipe, but we have to determine the ingredients we'll need to make the dish.
Before we begin, let's learn a bit about Mohnish Pabrai. He manages Pabrai Investment Funds and, since 1999, has \"delivered annualized returns of over 28% (net to investors).\" With a track record like that, he's worth listening to.
Low risk, high returnThat's how he does it. That's the message of the book. As an investor, Pabrai says stick to opportunities that have huge return potential with as little risk as possible. Intuitively, that makes perfect sense. Unfortunately, as humans, we're not wired that way, and we haven't really been taught to think that way.
Humans love action. We want to make things happen. We want every day to be filled with activity. Pabrai says, not when it comes to investing! The title of Chapter 10 \"Few bets, big bets, and infrequent bets.\" What kind of fun is that Pabrai isn't looking to make investing fun -- he's looking to make you a better investor.
I think one reason we do this is because we've been taught that higher risk is the way to generate higher reward. We have to take risk to earn a higher return. Think about Dendreon (NASDAQ:DNDN) and the ups and downs associated with the trials of Provenge. There are lots of people looking to make money there, and some investors can do it. Under his framework, outlined in Chapter 5 with details following in each chapter, I don't think Pabrai would consider Dendreon as an investment opportunity. The return potential is high, but the risk of loss is high as well. That's not the Dhandho way.
Every investor is different. Everyone looks at things through his or her own lens. Everyone assess the odds differently. Everyone defines a moat differently. Some don't know what a moat, or sustainable competitive advantage, is, much less how to assess one. Guess what If you want to be an investor, you have to put in the time to learn what a moat is, what margin of safety is, or what the Kelly Formula is. Pabrai gives readers the roadmap, and it's up to us to chart the path we want to take.
Granted, I admit I'm biased, because this happens to be similar to the way I invest my personal portfolio. But even if you don't want to run a concentrated portfolio, the book contains plenty of powerful messages to help you assess investment opportunities and make you a better investor.
In 2005, Mohnish came to the conclusion that poverty is driven by lack of education. So he and his wife founded the Dakshana Foundation; a non-profit operating with the same principles that made him a wildly successful value investor, using checklists and simple metrics to help educate Indians living in slums.
He then goes on to introduce several great examples of businesses where the Dhandho investor arbitrage spread lasted only a few months, while others spanned decades. A short-lived arbitrage spread allowed the cable company, CompuLink, to tap into the distribution chain by at all times being one step ahead of their slower-moving, bigger competitors via constantly introducing nimbler cables to vendors until competitors got to catch up with the innovation. A longer-lived example included that of GEICO who reaped a Dhandho arbitrage spread by being first at selling cost-effective all insurance policies using inbound call centers and the internet, giving it a dominating position in auto insurance still maintained today after competitors narrowed the arbitrage spread.
Pabrai states that, due to brutal capitalism, all Dhandho arbitrage situations will eventually be eroded, but two important factors can allow investors to earn excellent returns in the interim: the size of the spread (or moat), and its duration.
A central theme of the book is the notion that the market often confuses the distinction between high uncertainty and high risk. But these are exactly the kinds of situations where the market tends to discount businesses below intrinsic value, and where value investors can come in and reap sizable rewards. This was my favorite part of the book. Mohnish uses three brilliantly detailed examples of investments made in the Pabrai Funds where he took advantage of low-risk, high-uncertainty situations to earn spectacular returns, often in a relatively short time.
Selling an investment is much more prone to human irrational behavior in taking a correct decision due to the commitment bias of owning that investment. Seasoned investors have all experienced exactly this problem by either falling in love with a stock or hanging on with a nagging hope.
Furthermore, if after three years the investment has not reached intrinsic value, Mohnish argues that one is likely to be wrong about the estimate of valuation or intrinsic value has decreased, and one should therefore sell. On the other hand, should the price rise to within 10% of intrinsic value, he recommends investors to think about going ahead and selling after taking account of the tax bite. Exceptions might include short term capital gains relevant for U.S. investors. Ultimately, if the price rises to or above intrinsic value, the investor should exit the Chakravyuha to look for other opportunities.
Valuation is at the heart of any investment decision, whether that decision is to buy, sell, or hold. In The Little Book of Valuation, expert Aswath Damodaran explains the techniques in language that any investor can understand, so you can make better investment decisions when reviewing stock research reports and engaging in independent efforts to value and pick stocks.
In a straightforward and accessible manner, The Dhandho Investor lays out the powerful framework of value investing. Written with the intelligent individual investor in mind, this comprehensive guide distills the Dhandho capital allocation framework of the business-savvy Patels from India and presents how they can be applied successfully to the stock market. The Dhandho method expands on the groundbreaking principles of value investing expounded by Benjamin Graham, Warren Buffett, and Charlie Munger.
Using a light, entertaining style, Pabrai lays out the Dhandho framework in an easy-to-use format. Any investor who adopts the framework is bound to improve on results and soundly beat the markets and most professionals.
In a straightforward and accessible manner, The Dhandho Investor lays out the powerful framework of value investing. Written with the intelligent individual investor in mind, this comprehensive guide distills the Dhandho capital allocation framework of the business savvy Patels from India and presents how they can be applied successfully to the stock market. The Dhandho method expands on the groundbreaking principles of value investing expounded by Benjamin Graham, Warren Buffett, and Charlie Munger. Readers will be introduced to important value investing concepts such as \"Heads, I win! Tails, I don't lose that much!,\" \"Few Bets, Big Bets, Infrequent Bets,\" Abhimanyu's dilemma, and a detailed treatise on using the Kelly Formula to invest in undervalued stocks. Using a light, entertaining style, Pabrai lays out the Dhandho framework in an easy-to-use format. Any investor who adopts the framework is bound to improve on results and soundly beat the markets and most professionals.
The book starts off brilliantly. The first 4 chapters are illustrations of dhandho investing. The first chapter is about the success of Patels in the motel business in the US. How they came, saw, and conquered, from coast to coast, the business of inexpensive night stays for travellers. It gives a historic and geographic narrative (from Gujarat to Africa to US through 60s and 70s) of that incredible wealth building journey, from a socio-economic perspective. The second chapter is another motel success story, the third chapter is the story of Laxmi Mittal and his steel business, and the fourth chapter is about Richard Branson Virgin Atlantic. Yes, the last one kinda sticks out as an oddman, but I am willing to give the author a pass for making it interesting
And I have always thought innovation is the key to success in business. And while that may be true in an entrepreneurial venture that one launches into, it need not be true when it comes to investing or taking market bets. Such bets are best left to venture capitalists and PE companies, and not to John Rando investors like myself.
Mohnish Pabrai is an Indian-American businessman and investor. For a number of years, he turned heads with the performance of Pabrai Investment Funds since its inception in 1999. Pabrai has high regards for Warren Buffett and admits that his investment style is copied from Buffett and others. Over the next few weeks, we'll be exploring the topics in his book about value investing. 59ce067264