Customer Reviews

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

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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

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.

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.

"The Dhandho Investor" is mildly entertaining but filled with weak thinking and poor logic. For instance, Pabrai discusses Indian motel owners' "return on investment" for their motels, but ignores the fact that they are not taking salaries while working hard on their businesses; his "ROI" numbers are really imputed salaries, which is a very different matter. He lifts simple aphorisms from Buffett ("never invest in a business you don't understand") then freely discusses how little he knows about the industries he invests in, and how guilelessly he believes management's EPS forecasts in those situations. I could go on...

The bottom line, of course, is performance. All three of Pabrai's funds were down 60% in 2008. He was also down a few percent in 2007 (worse than the indexes then, too). If you invested with Prabrai in his first fund between its inception (October 2000) and the end of 2002, you would be up today. If you invested in 2003 or later, you would have lost more money than with an index fund strategy.

Here's Pabrai's January 2009 letter to investors, including stats on his returns: http://www.marketfolly.com/2009/02/mohnish-pabrai-letter-to-investors.html

Note that his letter shows unfair comparisons to the indexes because his index numbers ignore dividends for the S&P500 and Nasdaq. Pabrai also benefited by starting his fund when the indexes started to crumble... so he was buying into a downturn with a very small fund and with no pre-existing portfolio to weigh him down. This easy layup is exactly why we, the investing public, are wisely warned: "past performance is not indicative of future returns."

Pabrai has clearly had some big wins in the past, particularly some good picks during the 2000-2003 downturn. It's very possible that he will recover and show good returns in the future. However it's also clear that Pabrai is using a high-volatility, high-return strategy. He beats indexes by taking on lots more risk. His book's thesis -- that there's a free lunch if you follow his advice -- is laughable.

An easy read but essentially trivial. A hotelier example and a few other vignettes are used to make the case that there's a free lunch (no risk, high reward). As if it was that easy. Actually the hotelier example (investing a couple of million in a hotel in the middle of the So Cal desert, after 9/11, that just happened to work out) makes the case there is no free lunch. A better book is by Dreman, on contrarian investments, or "Fortune's Formula" by Poundstone, if you're into this thesis of a free lunch.

Avoid this book like the plague.

This an excellent book, because it gives a different perspective on contrarian investing (e.g. David Dreman). No books explore so well the Kelly formula applied to investing. It permeates the entire book and gives you the tools to implement the "maximum pessimism principle", which was championed by John Templeton. Besides that, two things stand out in this book: "focus on low risk, high uncertainty situations", and "be a cloner". Fortunately we don't have to pay royalties by using the ideas of Buffett, Munger, Graham, Templeton and Greenblatt, so let's clone the best of them. Re-invent the wheel is one of the worst thing in business, and worst than that is: "this was not invented here". However, the "Dhandho Approach" requires psychological fortitude because you have to deal with the uncertainty and purchase stocks which are not popular with the herd. The only fault is that the author does not provide a list of the 10-12 books that had the most influence on his investment strategy.

Overall this book is just OK. The concept of the book is "Heads I win. Tails I don't lose much". While this is a good philosophy implementing it is harder than this book leads you to believe.

The books presents solid arguements why you should only make a few investments and only when the odds are stacked in your favor but is lacking if you are looking for guidance in how to do that.

If you are new to investing and not sure what value investing is and/or why it makes sense then this book would be a good intro. On the otherhand if you already believe in the concept of value investing then you won't get much from this book.

In the beginning of the book the author acknowledges that there are no new ideas presented in this book and all the concepts have been taken from other sources. I agree. The book is about a 180 pages long and immensely redundant. If you were to get rid of the repetition and direct quotation of other sources, you could boil the book down to no more than a 100 pages. Although entertaining to read the success stories of individuals, I was a little disappointed that I decided to spend my Sunday reading this book.

There is nothing in the book that is not just common horse sense. Its examples are from ethnic Indians (from India) in the diaspora, but that is only for color. Simple and clear things we all know and always forget.

I am not trying to hate on this book - I saw a review of this on CNBC and they selected one passage and I was really intrigued by the idea of "heads i win, tails i dont lose much" (by the way, the book repeats this north of 20-30+ times and I got extremely sick of this as I went half-way through the book) and decided to read this on my own time. I have always found a lot of credibility in analysis driven by limited downside risk or "value" investing in the sense of investing at close to book value or when the probability of success is high given entry cost is low.

However, I could not help but loathe Pabrai's seemingly infatuated mindset with Buffett. This book is essentially 1) very rudimentary cash flow and financial background (if one can even call a few tables of numbers cash flow analysis), 2) half of the book is a ra-hash of either direct quotes from Buffett or how difficult Pabrai finds to mask his vague attempt to almost equate his investing style to that of Buffett's, and 3) largely a promotion of Indian-Hindu concepts as they relate to very prevalent and hardly insightful financial concepts.

I would not recommend anyone read this book. I usually don't leave reviews and this is the first one I have done - I promptly threw the book out after I read it that's how much I could not stand wasting 2-3 hours reading this guy's writing.