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The Dhandho Investor

October 29, 2018

The book “The Dhandho Investor” is written by Monish Pabrai. He is managing a hedge fund called Pabrai investment fund. Since its inception, Pabrai fund has delivered an annualized return of over 28%. He has been favorably profiled by Forbes and Barron’s and has made guest appearances on CNBC, Bloomberg TV and radio.

Dhandho is a Gujarati word. “Dhan” is from Sanskrit word “Dhana” meaning wealth and “Dhandho” literally means “endeavors that create wealth”

At the beginning of the book, you will find successful business stories of Papa Patel, Mani Lal Chaudhari, Richard Branson, and Lakshmi Mittal. The author has also quoted a few incidents from his life to make a connection with the reader.

After the initial chapters of successful stories, you will find the book into Dhandho Framework, which is nothing but the principles that have made the journeys of above mentioned gentlemen successful.

dhandho - The Dhandho Investor

The principles mentioned are

1) Focus on buying an existing business: It is always better to buy a fraction of an existing business.  Because it is less risky than starting a new business and fraction of a business can be brought through a stock market which clearly gives many advantages.

2) Buy a simple business in industries with an ultra-slow rate of change: Invest in the business which is simple to understand and whose cash flows are easy to measure.

3) Buy distressed businesses in distressed industries: Some assets are sold at discount because of their wretched near term prospects which can otherwise have a brilliant future, if worked upon in the right direction. Here, the author is saying that the purchase price should also be attractive.

4) Buy business with a durable competitive advantage-Moat: Invest in the business which has product differentiation and cost advantage that is durable. The author also says that businesses with durable moat even don’t last forever. All businesses have a time frame within which it prospers.

5) Bet heavily when the odds are overwhelmingly in your favor: Investing is all about looking for misprices business opportunity and betting heavily when the odds are in our favor.

6) Focus on Arbitrage: They allow us to earn high return with no risk. Invest in the business that is successful in bridging the product and service gap in the existing world.

7) Buy business at big discounts to their underlying intrinsic value: Invest only when the market value of the asset is significantly below the intrinsic value. It is also known as margin of safety.

8) Look for low risk, High uncertainty business: Low risk and high uncertainty is a wonderful combination because high uncertainty in business will lead to low price and low risk means minimum downside risk. Downside risk can be reduced by buying the asset or share at low depressed price.

 9) It’s better to be a copycat than an innovator: Here, the author is saying Innovation is a crap-shoot but good cloners are a great business to invest. It is not only cloning others’ idea but also lifting and scaling it up. Good cloners will essentially improve upon the ideas of innovators.

Moving forward, you will find the author to be giving a lot of examples of the businesses which have created an extra ordinary wealth through their endeavors. The author always emphasizes on his rule: Heads, I win; tails, I don’t lose much! This essentially means taking bets which have very low risk but high return.

There will also be a mention of finance concepts like DCF analysis, Fortune formula by William Poundstone, margin of safety, Greenbatt’s magic formula etc.

You will also able to find the quotes of Warren Buffet and Charlie Munger throughout the chapters. Numerous case studies of McDonald’s, Microsoft, Frontline, GEICO, Stelwart Enterprises, American express, Universal stainless and alloy products etc. can be found throughout the book.

The beginning few chapters focus on various criterion that help us choose the investments which could be great to invest in. The Concluding chapters of the book Abhimanyu’s Dilemma- The art of selling, to index or not to index-This is the question and Arjuna’s focus: Investing lessons from a great warrior are very enriching because it says how to exit our investment.

Abhimanyu’s Dilemma-The art of Selling: Making an investment is only half of the battle. We also need a vigorous strategy to sell. A Dhandho investor should try to sell when the market price exceeds the intrinsic value.

To Index or Not to index- That is the question: Only handful of money managers are successful in besting the index. He says that most of the investors should consider buying an index to be a good option. One can also incorporate some of the index like traits in the portfolio and also manage some of the assets actively.

Arjuna’s Focus, Investing lesson from a great warrior: Dhandho investor only invests in simple and well understood business. This is to eliminate 99% of possible investment alternatives.

He concludes the book by saying that “Life focused purely on maximization of wealth or creature of comfort for self and family is a sub-optimal approach to living”. He also says that “We cannot change the world, but we can improve this world for one person, ten people, a hundred people, and maybe even a few thousand people”. The stories inside the books are real and teach us important investing lesson that is really inspirational.

K Poonkundran

MBA-FA(2017-19)

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