Many value investors follow Warran Buffett and Benjamin Graham investing style. However, there has not been many who managed to duplicate the success as Mohnish Pabrai did. Being a value investor requires a hunger for learning and patience. If you want to read this book, this post will answer all your questions.
The Dhandho Investor is a stock market investing book written by Mohnish Pabrai, the CEO of the Dhandho funds. The Dhandho investor introduces rules and structures that many successful value investors use by focusing on buying undervalued companies with minimal downsides. The book is written in simple English and easy to read format.
Dhandho is a Gujarati (an Indian language) word that translates literally to endeavours that create wealth. The street translation is simply business. The book focuses on reducing the risk to a minimum when approaching business. The following is a summary of the book.
Quick summary of the Dhandho Investor
The book takes us on a journey of how Indian-American immigrants succeeded in buying businesses in distressed industries, which enabled them to purchase those businesses when they were undervalued and operate them efficiently to reduce the cost of services and beat their competitors.
In his early days, Mohnish started his entrepreneurial journey by founding an IT consulting service company called TransTech. Computers were a niche market back in 1991 that enabled him to take virtually no risks financially and build the business to success. He sold his IT consulting in 1999 and started his investment fund in the same year with $1 Million of assets under management which turned into $10 million in less than five years.
Mohnish possesses the mindset to be a successful entrepreneur and investor with a particular philosophy for success. You can learn the top four success attributes of Mohnish Pabrai’s success here.
The Dhandho framework focuses on buying a distressed business with a high degree of uncertainties that scare most investors, enabling value investors such as Mohnish to profit from the uncertainties by buying stocks when they are underpriced. This investing style has allowed Mohnish to be in the same league as other successful value investors.
Some of Mohnish Pabrai famous quotes:
1- Heads I win, tails I do not lose much
2- Invest heavily when the odds are overwhelmingly in your favourMohnish Pabrai
What will you learn from the Dhandho Investor?
The Dhandho framework
The Dhandho framework is a set of rules which follow a proven long term stock market investing strategy. The rules are not something invented by Mohnish; It is a commonly accepted strategy used by many value investors.
1- Focus on buying an existing business
Buy a business that is already producing income. When it comes to buying a stock, you imminently have stake ownership in the company without the need to run the business yourself, and you can start with very small capital.
Going after an existing business is a way of protecting yourself against any unforeseen events that are not possible if you are starting one from scratch. Because existing business has a history of income and management performance, you can check. In addition, you have the luxury of picking the time and price you want to invest in that company.
2- Buy a simple business in industries with a slow rate of change
Change is the enemy of investment, as Warran Buffett describes it. Buying such businesses is about having the assurance that the company will have a sustainable income for the next few years without losing market share to competitors. Almost all industries have some element of change, especially with tech industries; therefore, it is crucial to stick to your circle of competence.
3- Buy distressed businesses in distressed industries
This means focusing on buying a wonderful business that is currently undervalued because of current industry distress or internal company issues. The savvy investor job is to distinguish between short term market turbulence and long term issues. Therefore, understanding the companies you want to invest in is the key to picking winners.
4- Buy businesses with a durable competitive advantage – the moat
For a business to grasp market share and stay relevant, it must have a competitive advantage that protects it from its competitors. There are many types of competitive advantages, such as a networking effect like Facebook (Meta) or a brand effect like Apple. To understand more about a company’s economic moat, here is an article you should read: How To Identify An Economic Moat.
5- Bet heavily when the odds are overwhelmingly in your favour
You only need a few good investments to do well in the stock market, and making few bets and only betting when the odds are in your favour you can increase the chances of making good investments. This is why you need to know how much capital you are allocating to your assets.
6- Focus on arbitrage
Arbitrage is an attempt to profit by exploiting the price difference in a product in different places or media. Arbitrage has a short window that the investor needs to take advantage of before the arbitrage spread and disappear.
There are a few types of arbitrage, such as traditional commodity arbitrage, such as gold in one region is worth more in another. The second is correlated stock arbitrage. And Finally, Dhandho arbitrage is investing in low-risk and high uncertainty businesses. It is worth noting that all arbitrage will end; savvy investors are the ones who get in early before it spreads and the window closes.
7- Buy businesses at a big discount to their underlying intrinsic value
Also known as the margin of safety, which is buying below the asset’s fair value. Doing so reduces the risk of losing your initial invested capital if you were wrong in your analysis. Learn how about the Margin of safety here.
8- Look for low-risk, high uncertainty businesses
Determine that a business has virtually no downside but is going in short term market uncertainty. When the risk is minimal, investing heavily in such a business makes sense. Wall street usually confuse high uncertainty with high risk, which is not always true. You can profit from wall street ignorance by focusing on the business that offers no risk with potentially high returns.
9- It is better to be a copycat than an innovator
Stick to what works; if it’s not broken, do not fix it. Innovation is good, but it is not desirable to investors if it puts an element of risk. Therefore, finding a niche company or product that successfully duplicates the success of another company or product can be a winning formula. Papri is known to be a shameless cloner in many aspects of his business and investments. Nevertheless, it is always important to do your due diligence before making any decision.
Stock entrance and exit strategy
The market is not as efficient as many think. While public companies’ stock prices can go through dramatic changes in a few minutes, fundamental business changes can take months, if not years. Therefore, the investor must have an entrance and exit strategy planned.
The exit strategy is helpful if the investor is wrong in his analysis. The investor must give at least two to three years for the uncertainties about a business to pass before you start to see changes in the stock price. Mohnish suggests that the investor should look to sell after three years if there are no changes with the business to prevent further losses and look for a better opportunity.
Patience is a virtue in investing; you need to give the stock enough time to give its fair value. Therefore, selling too early might make you miss on future gains and selling too late can incur further losses, so having a solid entrance and exit strategy is good to discuss before buying any stock.
Who should read the Dhandho Investor?
This book does not market itself to any specific group. It is written for anyone who has an interest in the subject. The book is easy to read and quite interesting, especially in the first few chapters with successful business stories and lessons learned from Indian immigrants, Richard Branson and Mohnish’s early business ventures.
I did not find anything challenging to learn, maybe because I am very familiar with the topic. However, I would say that the book is quite short and brief on many topics. I wish this book went into more details on the discounted cash flow and gave more company analysis. If the reader is looking for more exposure in the matter, the Intelligent Investor by Benjamin Graham is a good start that even Mohnish recommend. You can also visit the Young Hero Investor book library if you are looking for more stock market investing books.
Non the less, this book is very enjoyable to read, and it is quite inspirational in many aspects. The book offers an excellent introduction to the subject and is written with a long term investor in mind. If you want to give this book a read, you can use the link below to buy it on Amazon.