I attended a talk by Mohnish Pabrai a few years ago in Mumbai. He spoke about his philosophy of investing, which has been heavily influenced by Warren Buffet. But there were also some unique perspectives that he had. Now, Mohnish has written a book that every investor and entrepreneur must read: The Dhandho Investor. The subtitle The Low-Risk Value Method to High Returns could as easily have been Heads I win, Tails I don’t lose much.
From the book’s inside flap:
All investors are told that if you want to earn high rates of returns, you must take on greater risk. Of course, the groundbreaking value investing strategies of Benjamin Graham, Warren Buffett, and Charlie Munger have shown that it is indeed possible to keep risk to a minimum while still making a reasonable profit. The Dhandho method takes their successful approach to investing one step further and shows how you can actually maximize rewards while minimizing risk.
Dhandho (pronounced dhun-doe), literally translated, means “endeavors that create wealth.” In The Dhandho Investor, Mohnish Pabrai demonstrates how the powerful Dhandho capital allocation framework of India’s business-savvy Patels can be successfully applied and replicated by individual value investors in the stock market. The Patels, a small ethnic group from India, first began arriving in the United States in the 1970s as refugees with little education or capital. Today, they own over $40 billion in motel assets in the United States, pay over $725 million a year in taxes, and employ nearly a million people. How did this small, impoverished group come out of nowhere and end up accumulating such vast resources? The answer lies in their low-risk, high-return approach to business: Dhandho. This book will show you how to use that same technique to generate high returns in the stock market.
Pabrai’s hedge funds, Pabrai Investment Funds, have outperformed all of the major indices and over 99% of other managed funds. $100,000 invested with Pabrai in 1999 was worth over $659,000 by 2006an annualized return of over 28% after all fees and expenses. In this book, Pabrai distills the methods of Buffett, Graham, and Munger into a user-friendly approach applicable to individual investors. Combining their legendary investing wisdom with the business acumen of the Patels, Pabrai lays out the Dhandho framework in an easy-to-use format that will help any investor significantly improve on their results and soundly beat the marketsas well as most professionals.
The key concept to glean from this book is the difference between uncertainty and risk. According to Pabrai, most investors don’t understand the difference. Risk means the chance of a loss of capital. Uncertainty is the range of different outcomes. So a stock may have high uncertainty but may not be risky, if no one knows what will happen but the worst case scenario would not results in a huge loss. According to Pabrai, these investments provide the greatest opportunities for investors.
The Dhandho Investor is pretty lean for an investment book –183 pages with fairly large type. Consequently, it’s short on specifics. You won’t really learn about how to analyze stocks. But that’s fine. There are hundreds of books for that. But Monish Pabrai has presented a compelling way of looking at investing and decision-making in general, and reading this book will likely benefit any investor.
Here is an outline of Mohnish Pabrai’s Dhandho Framework which he discusses in detail in the book:
Invest in Existing Businesses
Invest in Simple Businesses
Invest in Distressed Businesses in Distressed Industries
Invest in Businesses with Durable Models
Few Bets, Big Bets, Infrequent Bets
Fixate on Arbitrage
Margin of Safety Always
Invest in Low-Risk, High-Uncertainty Businesses
Invest in the Copycats rather than the Innovators
Tomorrow: Everything is Miscellaneous
TECH TALK Good Books+T