The Dhandho Investor is one of the books that can part a lot of wisdom to investors like us. There are plenty of investors out their and there are only few ones that are actually successful in what they are doing. We must seem for these types of people but they are often out of our reach and the easiest way to learn from them is by seeking some of the information that they shared on the public. One of this is by reading the books that they published. During in one of my research, I have stumbled upon a book named Dhandho Investor. I thought it would be a useful book so I read it. In this article, I will summarize this book that I thought that would be useful for any aspiring investors out there.
The term ’Dhandho’ in Mph mosh Pabrai’s book The Dhandho Investor is a Gujarati word that literally means endeavours that create wealth. Broadly, it means doing business. But the word also carries a special connotation. It refers to the ‘low-risk high-return’ approach to business that is the hallmark of Gujaratis.
The author, Mohnish Pabrai is a US-based fund manager and a value investor. He advocates investing in a stock at the time of maximum pessimism, when its price has been beaten down by negative news. Reacting in a knee-jerk fashion, the markets tend to drive the prices of such stocks very low, often far more than is warranted by the magnitude of the problem.
Whenever a negative news comes out, this well knowledgeable investor can see this a a the market making a mountain out of a mole hill, and with time the company will be able to work its way out of the hole. He buys the stock and holds it until the company, and its stock price, recover. Warren Buffett, the greatest investor of all time as well as Pabrai’s inspiration, has purchased a huge portion of stocks in American Express after the salad oil scandal and this was a classic play along these lines.
Pabrai begins his book by citing examples that illustrate the ‘dhandho’ way of investing. The Patels, who were driven out of Uganda by Idi Amin, landed in the US in 1972 as impoverished immigrants. The USA’s motel industry was then in a recession. The Patels bought motels at very low prices. They pared operating costs to the bone by removing hired help and deploying family labour. From those humble beginnings, the community has amassed motel properties in the US worth over $40 billion.
Lakshmi Mittal, the steel magnate, also personifies the ‘dhandho’ approach. He buys steel plants in distressed geographies amid depressed economic conditions. Steel is anyway an industry whose economics are considered unattractive. Since no other entrepreneur will touch closed steel mills in places like Kazakhstan with a barge pole, Mittal is able to buy them for 10 cents to the dollar. He then turns them around with competent management.
By buying an asset at a very low price, you curtail your downside risk — the maximum you can lose. The upside — what you can make — is potentially very large. As conditions improve, beaten down assets begin to perform and turn into money spinners. You must, of course, be astute enough to be able to distinguish between assets that have suffered only a temporary setback versus those that have got permanently impaired.
Pabrai is a former tech entrepreneur. He sold his start-up — which he had launched with a meagre capital of $100,000 — for $20 million in just 10 years. In 2000 he started the Pabrai Fund. He is an acolyte of Warren Buffett and Charlie Munger and admits to having borrowed liberally from their value-oriented approach.
Investing, according to the author, should be treated as a game of probability. Invest only when the odds are overwhelmingly in your favour, that is, valuations are very attractive. Such opportunities arise only rarely. When one comes your way, make a big bet. Make only a few but large bets, he advocates. He favours running a concentrated portfolio of only 5-10 stocks whose businesses you understand well.
After buying a stock at a deep discount, Pabrai suggests holding it for 18 months to three years. That is the time required for the clouds hovering over the company to dissipate and for the valuation gap — between the stock’s market price and its intrinsic value — to close. He likes to buy stocks priced at 50 per cent of intrinsic value and sells once it approaches 90-100 per cent. If the stock price hasn’t recovered in three years, there has probably been a mistake in stock selection.