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BOOK REVI EW/S UMMARY:
THE DHANDHO I NVESTOR MOHNI S H
PABRAI
W R I T T E N B Y B J R N K I J L
InhislatestbookTheDhandhoInvestor,valueinvestorMohnishPabraishows
youhowyoucanmaximize yourinvestment returnswhileminimizing your risk.
R I S K , R E T U R N A N D TH E DH A N D H O F R A M E W O R K
Mostpeoplethinkriskandreturnarerelated.Allinvestorsaretoldthatifyouwant
toearnhighratesofreturn,youneedtotakeongreaterrisks.However,value
investorslikeBenjaminGraham,WarrenBuffett,andJoelGreenblatt haveshown
thatit is actuallypossibletomake great profitswithrelativelylowrisklevels.
Dhandho,literallytranslated,meansendeavoursthatcreatewealth. InThe
DhandhoInvestor, Mohnish PabraidescribeshisDhandhoinvestmentframework
withwhichyoucanearnhighreturnswithlowrisklevels.
MohnishPabraiistheManagingPartnerofPabraiInvestmentFunds,aclosereplica
oftheoriginal1950sBuffettPartnerships.Sinceitsinceptionin1999, Pabrai
InvestmentFunds,has outperformedallofthemajorindicesandover99%ofother
managedfundswithanannualizedreturnofover28%afterallfeesandexpenses $
100,000investedwithPabraiin1999wasworthover$659,000in2006!
TheDhandhoframeworkconsistsofnine core principles.We willshortlypay
attentiontoalltheseprinciples.
P R I N C I P L E # 1 : FO C U S O N B U Y I N G A N E XI S T I N G B U S I N E S S
AccordingtoPabrai,havingshares(read:ownershipstakes)inafewpubliclytraded,
existingbusinessesisthebestpathtowealth. Thereareseveral advantageswiththis
wayofinvesting:noheavyliftingisrequired,onthestockmarket you can
sometimes findreal bargainbuyingopportunities,youdontneedalotofcapitalto
startinvestinginpubliclytradedstocks,thereisan ultralargeselectionofstocks
(read:companies)available,and withonlinebrokers frictionalcostsareverylow.
P R I N C I P L E # 2 : I N V E S T I N S I M P L E B U S I N E S SE S
Simplicityisanextremelypowerfulconstruct. ForEinstein,simplicitywasthehighest
levelofintellect. The Dhandhowayofinvestingissimple,andthereinliesitspower.
Onlyafterbuyingaspecificstock,thepsychologicalwarfarewithourbrainsreally
getsheated (seealsoPrinciple#3).Tofightthesepowerfulpsychologicalforces,you
needtobuypainfullysimplebusinesseswithpainfully simple thesesforwhyyoull
likelyearnadecentprofitand are unlikelytolosemuchmoney.Ifyouneeddifficult
spreadsheetcalculations ormorethan one shortparagraphforyourthesis,you
shouldlookatanotherinvestmentopportunity.
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P R I N C I P L E # 3 : I N V E S T I N D I S T R E S S E D B U S I N E S S E S
Stockprices,inmostinstances,reflecttheunderlyingfundamentals.But thats not
always thecase.AccordingtoPabrai,humanpsychologyaffectsthebuyingand
sellingofstocksmuch morethanthebuyingandsellingofentirebusinesses. Bad
newscomingoutsometimesleadstoextremefear,stockdumpingand a verylow
valuationasaconsequence.
Youshouldlookforsimplebusinessesthatareunderdistress,soyoucanbuythem
atunreasonablylowprices. Youcanfindsuchdistressedbusinesses bye.g.reading
badheadlinestoriesaboutcertainbusinessesorindustries,lookingforstockswith
lowpricetoearningsratiosorreadingabook like The LittleBookThatBeatsthe
Market written byvalueinvestorJoelGreenblatt.
P R I N C I P L E # 4 : I N V E S T I N B U S I N E S S W IT H D U R A B L E M O A T S
Onlybusinesseswithdurablemoats or,inotherwords, onlybusinesses with
sustainablecompetitiveadvantages areabletoshowaboveaveragereturnson
theirinvestedcapital. Suchcompaniesareabletoearnmoremoneyfortheir
investorsthancompanieswithoutdurablemoats.
Overtime,thepowerof all moatstendstoweaken.CharlieMunger once mentioned
thatofthefiftymostimportantstocksontheNYSEin1911,todayonlyone isstillin
business (GeneralElectric).So,evenbusinesseswithdurablemoatsdontlast
forever. Youshouldtakethatintoaccount,whentryingtoestimatetheintrinsic
valueof a company.
P R I N C I P L E # 5 : F E W B E T S , B I G B E T S , A N D I N F R E Q U E N T B E T S
WarrenBuffett once saidthatdiversificationcanbeseenasaprotectionagainst
ignorance.Intheend,investingisjustlikegambling.AccordingtoPabrai,looking
outformispricedbettingopportunitiesandbettingheavilywhentheoddsare
overwhelminglyinyour favour isthetickettowealth.Havingaportfolioofe.g.100
companiesdoesntmakesensewhenyouwantto earn aboveaveragereturns.
P R I N C I P L E # 6 : F I X A T E O N A R B I T R A G E
Alwayslookforarbitrageopportunitieswithspreadsaswideandlongaspossible.
Arbitrageopportunitieshelpyoutoearnahighreturnoninvestedcapitalwithlow
levelsofrisk. AnenduringDhandhoarbitragespread canbeseenasa moatora
durablecompetitiveadvantage. Youshouldbeawarethat,overtime,arbitrage
spreadseventuallydisappear.Thecriticalquestionthenis:howlongisthespread
likelytolastandhowwideisthemoat really?
P R I N C I P L E # 7 : MA R G I N O F S A F E T Y A L W A Y S
Thebiggerthediscounttointrinsicvalue,theloweristherisk.Thebiggerthe
discounttointrinsicvalue,thehigherwillbethereturn.Mostofthetime,assetsare
tradedatorabovetheirintrinsicvalue.Youshouldpatientlywaitforfindingcheap
stockswithalargemarginofsafety,alowriskandahighupsidepotential.
Havingamarginofsafety inordertominimizeriskoflossis ofcrucialimportance:
whenyoulose e.g. 50%youneedtomakeaprofitof100%foronlygettingyour
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moneyback.Especiallyinthelongterm,thecostoflossisextremelyhigh.Thisis
relatedtotheincrediblepowerofcompounding (formoreinformation, click here).
P R I N C I P L E # 8 : I N V E S T I N L O W R I S K , H I G H U N C E R T A I N T Y
B U S I N E S S E S
Risksanduncertaintyaredifferentconcepts.Thefutureperformanceofacompany
indistressmaybeuncertain.But,whenyouhave carefully thoughtthroughthe
rangeof possiblefuturescenarios andconcludethattheoddsofapermanentlossof
capitalareverylow,youmayhavefoundalucrativelowrisk,highuncertainty
investmentopportunity. Whenextremefearsetsin,stockmarketsmaybehave
irrational. ByapplyingtheDhandhotechniques,youcanprofitfromthisirrational
behaviour.
P R I N C I P L E # 9 : I N V E S T I N T H E C O P Y C A T S R A T H E R T H A N T H E
I N N O V A T O R S
AccordingtoPabrai,innovationisacrapshoot,butcloningisforsure.Therefore,
goodclonersaregreatbusinesses.Lookforbusinessesrunbypeoplewhohave
demonstratedthattheyareabletorepeatedlyliftandscaletheworkofthe
innovators.
F I N A L T H O U G H T S
TheDhandhoInvestor isagreatbookforpeoplewhowanttosignificantlyimprove
their investment results. Thebook canbeseenasagreatextensiontoand a
deepeningofthebasicvalueinvestingprinciplesasdescribedin abooklike The
LittleBookThatBeatstheMarket.
InTheDhandhoInvestor,MohnishPabraiclarifiesallprinciplesoftheDhandho
frameworkasmentionedabovewithalotofcasestudies andexamples. Besides,he
alsopaysattentiontosubjectsliketheartofsellingstocks,the(non)senseof
indexing,andwiselyspending themoneyyoucanmakebyleveragingtheDhandho
techniquesasdescribedinthebook.
Formoreinformationabout orordering TheDhandhoInvestor viaAmazon.com,
just click here.
AB O U T T H E A U T H O R
BjrnKijlextensivelystudiestheinvestmentprinciplesof value investorslikeWarren
Buffett,JoelGreenblatt,andMohnishPabrai and is alongtimeinvestorhimself.
BjrnholdsanMSc inBusinessInformationTechnologyfromtheUniversityof
Twenteinthe Netherlands wherehegraduatedcumlaude.
Thewebsite www.magicformulastocks.com isdedicatedtoexplain(freeofcharge)
whytoselectstockswithhighReturnsonCapitalincombinationwithhighEarnings
Yields.Thewebsitealsogivesaccesstoaregularenewsletteronvalueinvesting.
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