The Dhandho Investor: The Low - Risk Value Method to High Returns [Hardcover]

Mohnish Pabrai (Author)

Book Description

Publication Date: April 6, 2007

A comprehensive value investing framework for the individual investor

In a straightforward and accessible manner, The Dhandho Investor lays out the powerful framework of value investing. Written with the intelligent individual investor in mind, this comprehensive guide distills the Dhandho capital allocation framework of the business savvy Patels from India and presents how they can be applied successfully to the stock market. The Dhandho method expands on the groundbreaking principles of value investing expounded by Benjamin Graham, Warren Buffett, and Charlie Munger. Readers will be introduced to important value investing concepts such as "Heads, I win! Tails, I don't lose that much!," "Few Bets, Big Bets, Infrequent Bets," Abhimanyu's dilemma, and a detailed treatise on using the Kelly Formula to invest in undervalued stocks. Using a light, entertaining style, Pabrai lays out the Dhandho framework in an easy-to-use format. Any investor who adopts the framework is bound to improve on results and soundly beat the markets and most professionals.

Editorial Reviews

Review

"Today's greatest rising investor"--Motley Fool

"How to invest the way an Indian migrant with little money would do - by looking for companies with little downside…" (Financial Times, Tues 26th February)

From the Inside Flap

All investors are told that if you want to earn high rates of returns, you must take on greater risk. Of course, the groundbreaking value investing strategies of Benjamin Graham, Warren Buffett, and Charlie Munger have shown that it is indeed possible to keep risk to a minimum while still making a reasonable profit. The Dhandho method takes their successful approach to investing one step further and shows how you can actually maximize rewards while minimizing risk.

Dhandho (pronounced dhun-doe), literally translated, means "endeavors that create wealth." In The Dhandho Investor, Mohnish Pabrai demonstrates how the powerful Dhandho capital allocation framework of India's business-savvy Patels can be successfully applied and replicated by individual value investors in the stock market. The Patels, a small ethnic group from India, first began arriving in the United States in the 1970s as refugees with little education or capital. Today, they own over $40 billion in motel assets in the United States, pay over $725 million a year in taxes, and employ nearly a million people. How did this small, impoverished group come out of nowhere and end up accumulating such vast resources? The answer lies in their low-risk, high-return approach to business: Dhandho. This book will show you how to use that same technique to generate high returns in the stock market.

Pabrai's hedge funds, Pabrai Investment Funds, have outperformed all of the major indices and over 99% of other managed funds. $100,000 invested with Pabrai in 1999 was worth over $659,000 by 2006—an annualized return of over 28% after all fees and expenses. In this book, Pabrai distills the methods of Buffett, Graham, and Munger into a user-friendly approach applicable to individual investors. Combining their legendary investing wisdom with the business acumen of the Patels, Pabrai lays out the Dhandho framework in an easy-to-use format that will help any investor significantly improve on their results and soundly beat the markets—as well as most professionals.

Pabrai also details each deceptively simple Dhandho concept in a straightforward, entertaining fashion, with individual chapters that explain why you should: Invest in Simple Businesses, Fixate on Arbitrage, Invest in the Copy Cats Rather than the Innovators, and other simple but proven concepts for low-risk, high-reward Dhandho investing.

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Product Details

• Hardcover: 208 pages
• Publisher: Wiley; 1 edition (April 6, 2007)
• Language: English
• ISBN-10: 047004389X
• ISBN-13: 978-0470043899
• Product Dimensions: 9.1 x 6.1 x 1 inches
• Shipping Weight: 13.4 ounces (View shipping rates and policies)
• Average Customer Review: 3.7 out of 5 stars  See all reviews (57 customer reviews)
• Amazon Best Sellers Rank: #80,786 in Books (See Top 100 in Books)

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Most Helpful Customer Reviews

75 of 81 people found the following review helpful:

4.0 out of 5 stars Heads, I win; Tails, I don't lose that much!, April 6, 2007

By 

James East (Charlotte, NC) - See all my reviews
(VINE VOICE)    (REAL NAME)   

This review is from: The Dhandho Investor: The Low - Risk Value Method to High Returns (Hardcover)

Dhandho (dhun-doe) is defined as "endeavors to create wealth" or in common vernacular as just simply "business". In Mr. Pabria's Dhandho Investor, it is a book divided into two parts. The first part is a terrific collection of stories of how the Dhandho way changed some family lives by creating family wealth the Dhandho way that is a true pleasure to read. The pleasure is so enlightening that afterwards one is so encouraged that almost anyone would want to go out and replicated the stories and buy their own business or motel today. Though simpler said than done, the analysis that each of these true family experiences exhibit is that with low risk analysis and techniques will help stack the odds in their (your) favor such that the risks, once low, the potential is present for extremely high returns. How does one do this as it sounds like a typical get rich scheme? Not to give the full story away, as it is a somewhat short book, several of the methods outlined and discussed are well documented by masters like Buffett, Munger, Graham, and others. As any study of these gentlemen will reveal is that a margin of safety is one of them. The other is either leverage up or scale up.

This is where the second part of the book takes off by more fully explaining some of the techniques of the masters above. One of the bigger themes and some business acumen that seems to be overlooked in most investment books is that one should invest heavily in your best ideas verses the more simpler and conventional wisdom way of diversifying your risk. To exemplify and to paraphrase Buffett, "only use 20 punches in your investment life", and to more distinctly paraphrase Charlie Munger, "when the odds are in your favor, act decisively, and bet big". If you have a good solid idea and the odds are stacked your way, why would you only put 3% or less into it as many mutual funds do routinely. Another often overlooked item, but clearly defined here, is a distinct plan on when to sell after you have purchased. How many times have we bought and it immediately went down 20-30%, or went up, then came down and we continue to hang on? As it is more difficult to know when to sell than buy, Chapter 15 in the "Art of Selling" should help us all.

As the book illustrates throughout the text, whether an investor, entrepreneur, or speculator, one needs to look for situations which there is such a margin of safety that Heads, I win; Tails, I don't lose that much. Leverage this combination several times with passive investments in partial pieces of ownership in the market and toss in the Kelly Criterion (probability and investment size analysis) and one could be on their way to maximizing their potential wealth. Or at a minimum, to improve your own investment endeavors to create wealth, just following the lessons that are so vividly written and they will assist anyone reading this book for sometime, or for generations as Mr. Pabrai hopes.

All in, this outlined framework truly does capture many, if not all, of the thought processes and techniques of the masters above and is worthy of any investment collection. Or stated slightly differently, keep it simple, test the margin of safety, check the probabilities, and move in accordingly. The Dhandho Way

27 of 32 people found the following review helpful:

4.0 out of 5 stars Value investing..., May 31, 2007

By 

G. Soos "emanigol" (Dublin, GA United States) - See all my reviews
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This review is from: The Dhandho Investor: The Low - Risk Value Method to High Returns (Hardcover)

There was a point in this book (page 26) when I got very close to close it for good. The author sums up one of his lessons on Virgin Atlantic's Richard Branson "...If you can start a business that requires a $200 million 747 jumbo jet...for virtually no capital, then virtually any business that you want to start can be gotten off the ground with minimal capital." This is the same old familiar myth again, "starting from your one bedroom apartment you will rule the world". Page back just one page to learn that Branson was on track to earn $12 million that same year, $20 million the next year. That is, Branson was a little beyond the one bedroom stage. Giving him a $2 million one year chance seems less than risky from any bank's standpoint. And no, YOU can not walk into Boeing's headquarters to lease a jumbo jet.

But, if you read on, you find value here. The advice is to utilize discounted cash flow for valuation (demonstrated on BBBY, but not explained in great detail) and the subsequent case studies (even after the usual American Express, Washington Post and Geico stories) on Stewart Enterprises, Level 3 convertible bonds and Frontline are interesting, instructive and original. The author uses Kelly's Formula for capital allocation, but this is somewhat of a voodoo here: the probability breakdown is essentially entirely subjective and the author admittedly invests conservative 10% of his capital in the discussed stocks contrary to whatever the Kelly's Formula suggests.

The most enlightening are the emphasis on that Wall Street often confuses risk with uncertainty, the "few bets, big bets", "Abhimanyu's Dilemma" and "Arjuna's Focus".

I also disagree with the "Follow the copycats" advice. Microsoft may well be the one and only copycat who pulled off an unusual survival tale. I still believe Apple contributed much more to progress and shareholder value by being an innovator (even though they also "utilized" the GUI of Xerox long, long ago). When dealing with copycats, you would never know which one to bet on.

In summary, if you follow "buffettology" you may find limited gain here, but one has to give credit for the effort of the author to give us his perspective.

17 of 21 people found the following review helpful:

5.0 out of 5 stars Excellent Primer on the Philosophy of Value Investing, April 30, 2007

By 

Value_Guy (New York, NY) - See all my reviews

This review is from: The Dhandho Investor: The Low - Risk Value Method to High Returns (Hardcover)

Mr. Pabrai enjoys the distinction of being one of the best writers in the investment book universe. He is clear, concise, helpful and, above all, knowledgeable about his topic. If you doubt this, then all you have to do is look at his several articles in the past decade and/or his funds' returns. (They have regularly blown away the market averages with annualized returns -- after taxes and fees -- of over 28%.)

The Dhandho Investor, much like other classics in the genre, explains the philosophy behind value investing and the basic mechanics of taking this investment approach. Mr. Pabrai goes about this process in a very logical manner that is easily grasped by the reader. First, he demonstrates the tenets of a value approach by discussing various entrepreneurs who have taken the simple "Heads, I win; tails, I don't lose much!" approach. (This, by the way, is one of Pabrai's main points. Read the book to see what exactly he means.) Examples include the Patels, a group of refugees who currently own billions and billions of dollars worth of hotels, on up to Richard Branson, Virgin's iconoclastic founder. Next, he explores the basics of value investing, builds on those themes, adds case studies, and finishes with explanations of more technical aspects of investing, such as when to sell. What is wonderful, though, is that he retains readability throughout and makes even complicated topics accessible to the reader.

What is interesting about Pabrai is that he takes his idol, Warren Buffett's, ideas and expands them to a younger generation. He shows that a value approach relies on the investor's ability to: (a) think about, research and understand a business extremely well; (b) determine whether a company in that industry is worth buying based on this research; and (c) develop the temperament to buy only when the company sells at a discount to its intrinsic value. He shows how even a minimally internet-savvy investor can research a company quickly and effectively and then discusses such important topics as the art of selling; after all, buying a bargain stock implicitly requires that the buyer someday sell that stock once its value is realized. (Buffett likes to purchase stocks and hold them forever, but that is a stylistic difference between the two men. Still, WEB buys stocks that issue large dividends, so he is able to buy-and-hold, and then buy some more with the income from his dividend-paying stocks.)

In all, this is a great book to help one develop the perspective necessary for effective value investing. When you add on the real world examples of entrepreneurs who have followed a value approach to creating a business and Pabrai's examinations of his own investment choices (including an enlightening discussion of a purchase he made in which the stock price went significantly downward, but his analysis indicated the company actually became *stronger* as a result), this book should help to show why the best investors employ the value approach.

What this book will *not* show you is how to analyze financial statements, although it will give you a strong indication of what you should look for *in* those statements and elsewhere. If you are a beginner and supplement The Dhandho Investor with a basic education in financial statement analysis and accounting principles, you should be well on your way to becoming an accomplished value investor. If you are a more experienced investor, the book will serve to offer yet another perspective (and real world examples) of how to effectively employ a value strategy.