The Dhando Investor by Mohnish Pabrai

Summary
  1. Dhando investing is all about value investing – maximum rewards with minimal risk. Dhando = endeavors that create wealth. “Heads I win, tails I don’t lose much”
Key Takeaways
  1. Life is a journey and the journey is the destination
  2. Uses the Patel family from India as a case study. They first immigrated to the US in the 1970s and today own over half the motels in the US. They came from nothing but were able to buy distressed motels for little, get bank financing, live/work in these motels. Their downside was basically zero and upside was astronomical
  3. Dhando all about maximizing reward and minimizing risk
  4. Make few bets, big bets, infrequent bets (about 8-10 investments in your portfolio)
  5. 9 core Dhando Principles
    1. Focus on buying existing businesses
    2. Buy simple businesses with an ultra slow rate of change
    3. Buy distressed businesses in distressed industries
    4. Buy businesses with a durable competitive advantage (moat)
    5. Bet heavily when the odds are overwhelmingly in your favor
    6. Focus on arbitrage
    7. Buy businesses at big discounts to their underlying intrinsic value
    8. Look for low-risk, high-uncertainty businesses
    9. It’s better to be a copycat than an innovator
  6. “Our life is frittered away by detail…simplify, simplify.”
    1. “Everything about Dhando is simple, and therein lies its power. The psychological warfare begins after you buy stock. The most potent weapon to fight these forces is to buy painfully simple businesses with painfully simple theses for why you’re likely to make a great deal of money and unlikely to lose much. Always write the thesis down and if it takes more than a short paragraph, there is a fundamental problem”
  7. Moats are often mostly hidden
  8. High ROC, ROIC indicative of moats
  9. Kelly formula: edge / odds = fraction of your portfolio you invest in a company
  10. The spreads in arbitrage eventually close but the moat and time of spread very important
  11. Try not to sell anything, especially losers, within 3 years as this is typically the amount of time it takes for the price/value gap to close
    1. Any stock cannot be sold at a loss within two to three years unless you can say with a high degree of certainty that current intrinsic value is less than the current price the market is offering
  12. Most don’t understand the difference between risk and uncertainty, take advantage!
  13. Good management gives you upside options for free
  14. Screen – high dividend yield, low P/E, well off from highs
  15. All knowledge is cumulative. Read voraciously, wait patiently and swing big but infrequently
  16. Independence of thought is fundamental to sound investing
  17. Value investing fundamentally contrarian in nature
  18. Have a crystal clear exit plan when buying a stock. Pabrai typically begins selling some if market value comes to within 90% of intrinsic value and most of it if it reaches 100%
  19. Checklist
    1. Is it a business I understand very well – squarely within my circle of competence?
    2. Do I know the intrinsic value of the business today and, with a high degree of certainty, how it is likely to change over the next few years?
    3. Is the business priced at a large discount to intrinsic value today and in two to three years? Over 50%?
    4. Would I be willing to invest a large part of my net worth into this business?
    5. Is the downside minimal?
    6. Does the business have a moat?
    7. Is it run by able and honest managers?
  20. Idea Generation
    1. Value Investors Club – people do write ups on particular stocks and winners get $5,000 from Greenblatt
    2. Magic Formula Investing – put together by Greenblatt, compiles stocks with low P/E and ROIC
      1. Focusing on companies with a VIC write up and on MFI is an awesome place to focus
    3. Value Line – study their bottom lists (lost most value, trading at widest discounts to BV, lowest P/E, highest dividend yield)
    4. Look at companies at 52 week lows
    5. Outstanding Investor Digest – detailed interviews with great money managers
    6. Value Investor Insight – detailed interviews with great money managers
    7. Whale Wisdom – recent buying activity, 13Fs
    8. GuruFocus – recent buying activity, trends, interviews
    9. Super Investor Insight – 13F filings of the great investors
    10. Biannual Value Investing Congress – teach value investing and provide some potential opportunities
What I got out of it
  1. Really good, short read on how to think about investing