Jun 29, 2007 at 12:00AM Whatever you do, don't follow the investing framework laid out in this book. It will make my job as an investor that much more difficult because you'll be much more competitive. 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 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 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. As of March 31, 2007, Pabrai registered 13 holdings in his portfolio. Steel producer IPSCO (NYSE:IPS) makes up 18.4% of the portfolio. Independent energy company Harvest Natural Resources (NYSE:HNR) and financial services company Fairfax Financial Holdings (NYSE:FFH) round out the top three. These may not be household names, but when you read the book, you'll see why Pabrai likes them as investment opportunities. Low risk, high return That'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. What I liked most I think many of you are likely to disagree with what I'm about to say.
I like the fact that Pabrai only gives the framework and leaves out lots of details, instead giving examples of how he has used this framework in the past. 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.
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. I'm fortunate. I have a Dhandho-type investment in my portfolio, AES (NYSE:AES), and I've written about it several times. Now not everyone is going to find AES as an opportunity.
But with Pabrai's framework, you're more likely to recognize one going forward, giving you a leg up on the competition. 'That's exactly why I don't want you following Pabrai's framework,' he says tongue in cheek. What I didn't like I don't completely agree with principle two: Buy simple businesses in industries with an ultra-slow rate of change. On the surface, I see how you'd be able to find low-risk, high-return types of opportunities there. However, risk can be mitigated with knowledge. If you can recognize a business with an innovative or disruptive technology, then you can determine if it meets the low-risk, high-return criteria. Take, for example, a business with strong network effects like eBay (NASDAQ:EBAY).
When the company was changing its listing policies and fee structures, you would have thought the world was coming to an end. In a business with lots of change, lots of innovation, and lots of competition, I think that could make for a Dhandho-type investment. It's why I put eBay in my portfolio.
The Foolish bottom line Admittedly, there's nothing new about investing in this book. Lots of great lessons have been packaged together to form a very nice framework that Pabrai uses. That's not a knock on the book. Rather I think that's the beauty of it. 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. For more on things that can help make you a better investor, check out:.
eBay is a recommendation. Our Stock Advisor newsletter is running laps around the market. To be a part of the market-beating crowd, today for your free 30-day trial.
Retail and Consumer Goods editor is ranked 6,388 out of 31,195 in CAPS. He owns share of AES but does not own shares in any of the other companies mentioned. You can view his TMF profile. The Fool takes its very seriously.
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Andorra. Armenia. Austria.
Azerbaijan. Belarus. Belgium.
Bosnia and Herzegovina. Bulgaria. Croatia. Cyprus.
Czech Republic. Denmark. Estonia. Finland. France. Georgia.
Germany. Gibraltar.
Greece. Greenland. Holy See (Vatican City State). Hungary. Iceland.
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Ireland. Italy. Latvia. Liechtenstein.
Lithuania. Luxembourg. Macedonia. Malta. Moldova.
Monaco. Montenegro. Netherlands. Norway.
Poland. Portugal. Romania.
Russia. Serbia. Slovakia. Slovenia. Spain. Sweden. Switzerland.
Turkey. Ukraine. United Kingdom. American Samoa.
Australia. Bangladesh. Bhutan.
British Indian Ocean Territory. Brunei.
Cambodia. China.
Christmas Island. Cocos (Keeling) Islands. Cook Islands. Fiji. Guam. India. Indonesia.
Japan. Kazakhstan.
Korea (the Republic of). Kyrgyzstan. Laos. Malaysia. Maldives. Mongolia. Myanmar.
Nepal. New Zealand. Pakistan.
Papua New Guinea. So wrong it right. Philippines. Samoa. Singapore. Solomon Islands.
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Sri Lanka. Tajikistan. Thailand.
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Timor-Leste. Tonga.
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Vietnam. Description A comprehensive value investing framework for the individual investor 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. Patel Motel Dhandho. Manilal Dhandho.
Virgin Dhandho. Mittal Dhandho. The Dhandho Framework.
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Dhandho 101: Invest in Existing Businesses. Dhandho 102: Invest in Simple Businesses. Dhandho 201: Invest in Distressed Businesses in Distressed Industries. Dhandho 202: Invest in Businesses with Durable Moats. Dhandho 301: Few Bets, Big Bets, Infrequent Bets.
Dhandho 302: Fixate on Arbitrage. Dhandho 401: Margin of Safety—Always! Dhandho 402: Invest in Low-Risk, High-Uncertainty Businesses. Dhandho 403: Invest in the Copycats rather than the Innovators. Abhimanyu’s Dilemma—The Art of Selling.
To Index or Not to Index—That Is the Question. Arjuna’s Focus: Investing Lessons from a Great Warrior.
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Reading Notes - The Dhandho Investor Dhandho framework:. Invest in existing businesses. (Rate of change of industry is very slow). Invest in simple businesses. Invest in distressed businesses in distressed industries.
Invest in businesses with durable moats. We are best off never calculating a discounted cash flow stream for longer than 10 years or expecting a sale in year 10 to be at anything greater than 15 times cash flows at that time (plus any excess capital in the business). Few bets, big bets, and infrequent bets. I adjust for this by simply placing bets at 10 percent of assets for each bet. Fixate on arbitrage. The critical question is: How long is the spread likely to last and how wide is the moat?.
Margin of safety—always. Market analogy. A stock is a piece of a business - Margin of Safety. Make sure that you are buying a business for way less than you think it is conservatively worth - Dhandho journeys have always been all about the minimization of risk.
Whenever I make investments, I assume that the gap is highly likely to close in three years or less. My own experience as a professional investor over the past seven years has been that the vast majority of gaps close in under 18 months. Invest in low-risk, high-uncertainty businesses. Heads, I win; tails, I don’t lose much!. Invest in the copycats rather than the innovators - Innovation is a crapshoot, but investing in businesses that are simply good copycats and adopting innovations created elsewhere rules the world. In seeking to make investments in the public equity markets, ignore the innovators.
Always seek out businesses run by people who have demonstrated their ability to repeatedly lift and scale. It is the Dhandho way. To Enter or Not to Enter: 1.
Is it a business I understand very well—squarely within my circle of competence? Do I know the intrinsic value of the business today and, with a high degree of confidence, how it is likely to change over the next few years? Is the business priced at a large discount to its intrinsic value today and in two to three years? Over 50 percent?
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Would I be willing to invest a large part of my net worth into this business? Is the downside minimal? Does the business have a moat? Is it run by able and honest managers? Selling a stock: Any stock that you buy cannot be sold at a loss within two to three years of buying it unless you can say with a high degree of certainty that current intrinsic value is less than the current price the market is offering As a corollary, the only time a stock can be sold at a loss within two to three years of buying it is when both of the following conditions are satisfied: 1. We are able to estimate its present and future intrinsic value, two to three years out, with a very high degree of certainty.
The price offered is higher than present or future estimated intrinsic value. Don’t hesitate to take a realized loss once three years have passed. Within three years of buying, there is likely to be convergence between intrinsic value and price—leading to a handsome annualized return. Anytime this gap narrows to under 10 percent, feel free to sell the position and exit. You must sell once the market price exceeds intrinsic value.
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