The Dhandho Investor is a wonderful book written on the concept of Value Investing. The author Mohnish Pabrai, is an Indian American businessman investor and philanthropist. In the book, Pabrai talks about his investment style which he calls Dhandho investing which focuses on minimising downside and maximising upside to an investment
All students of finance (myself included) have always been taught that high risk = high returns and low risk = low return. Elementary logic would tend to agree with this philosophy. Pabrai takes this philosophy and turns it right on its head. In effect he says low risk = high returns, and this philosophy is at core of his investment style. But how does it all work out? Let’s take a look
Dhandho is a Gujarati word meaning business. Now, businesses are best run at low at low costs and low risks and our Gujarati friends are pioneers and thespians of this art. But how does a low cost, low risk style lend itself to investing?
Pabrai has always championed the cause of buying businesses and stocks at a significant discount to their intrinsic value. Now the intrinsic value of something, is nothing but its actual worth. So what Pabrai does is, buy a stock or a business worth say 100 rupees for 50 rupees or less.
The great thing about intrinsic value is that it can only go so low. So when you buy a stock at a significant discount to its intrinsic value, you’re automatically cutting the possible downside to your investment. And its a rule of nature that what is down today must recover tomorrow (whether the tomorrow comes in the next few months or years is another question altogether )… but the bottom line is if you’re patient enough you’re more than likely to make a hefty profit on your investment.
Pabrai further codifies his style through the use of nine tenets which he calls the Dhandho framework. The nine tenets are given below:
Invest in existing businesses
Invest in beaten down businesses in beaten down industries
Focus on Margin Of Safety (minimising downside and maximising upside)
Focus on Arbitrage
Invest in copycats rather than innovators (look for businesses with the ability to scale operations upwards)
Invest in businesses which are simple and easy to understand
Make few bets, big bets and infrequent bets (wait for the right stock, but once you find it, have the conviction to buy a truckload of it)
Invest in businesses with durable moats (strong and enduring competitive advantages)
Always buy a stock at a significant discount to its intrinsic value
When it comes to selling a stock Pabrai prescribes two simple rules. Firstly, sell a stock when the gap between its market price and intrinsic value is 90-95% covered. Secondly, if you have been holding a stock for three years or more, but are losing out on the investment, sell straight away.
The best thing about this book is the way Pabrai takes these seemingly incomprehensible concepts and explains them like it is child’s play.
As I close out this piece, I would like to remind you that what I have covered here is just the tip of the iceberg. So I implore all readers of this piece to grab a copy of The Dhandho Investor from their nearest bookstore or off the internet and spare a little time to read this book from cover to cover
Take it from me, because I myself have turned investor recently and have benefited immensely from reading this book.