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: 6.5 x 0.8 x 9.3 inches
• Shipping Weight: 13.4 ounces (View shipping rates and policies)
• Average Customer Review: 3.7 out of 5 stars  See all reviews (63 customer reviews)
• Amazon Best Sellers Rank: #63,514 in Books (See Top 100 in Books)

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Most Helpful Customer Reviews

78 of 84 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 VINE™ VOICE

Format: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

29 of 34 people found the following review helpful

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

By Jack Reader

Format:Hardcover|Amazon Verified Purchase

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.

18 of 21 people found the following review helpful

1.0 out of 5 stars Remarkably weak thinking May 19, 2009

By Longtime Amazon Fan

Format:Hardcover

"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.