The Dhandho Investor – Mohnish Pabrai – A review

Mohnish Pabrai is considered one of the most remarkable investors of his generation. Yet he was not an investor from start, but rather a business manager – a characteristic that has a lot in common with Buffett & Munger’s own experience.

Back in 2007, he decided (lucky us) to write a book about value investing, entitled The Dhandho Investor. The Low-Risk Value Method to High Returns (Wiley & Sons). It’s an easy read, gives a lot of real life examples and real investing experience. So it’s very valuable to any investor looking to better invest.

It’s also a great book because it also is about how to become a better person… A feature that is also common to Pabrai, Munger and Buffett, about how to take care of others and have a decent, honest life.

Well if you read his book you’ll get a good understanding of both and that’s probably what makes this book unique (Guy Spier in his book refers a lot to Pabrai and has the same kind of approach).

Book Review

The book can be read in a couple of hours if you’re not distracted. The framework to become a Dhandho Investor is laid out in chapter 5. One should invest in existing, simple, sometimes distressed businesses, look for businesses with moats (the ability to withstand competition and provide durable return on invested capital, higher than the cost of capital), do infrequent bets but bet heavily especially when the odds are in your favor.

As many other value investors, Pabrai underlines the importance of the price paid, which must give the investor a large margin of safety – the famous concept laid out by Ben Graham – when you want to buy the piece of a business.

Also, says Pabrai, « look for low-risk, high-uncertainty businesses ». The proposition in itself is weird if you believe in the efficient market hypothesis: if a business is highly uncertain, it’s risky, right ? That’s the brilliance of Pabrai to remind us that markets are far from being efficient. « Low risk and high uncertainty is a wonderful combination », rightfully writes Pabrai in his book (page 45). « It leads to severely depressed prices for businesses », which is a boon to investors looking to limit downside risk.

As many great investors, like Buffett, Munger, Marks, Graham, have long stated: what is the risk of a business which price has declined in the stock market ? Why not take advantage of Mr Market when he is ready to give you a big bargain/discount on a business that you know has a higher intrinsic value ? (of course you need to do your homework and know in advance what the intrinsic value might be, even with a margin of error)

Last advice: be a « copycat » rather than an innovator and look for businesses that have those characteristics.

There is also a great chapter (chapter 15) about the sell discipline. What to do if the business you buy a piece of has its price crashed by the market ? Well, stick to it, says Pabrai, at least for a couple of years.

The chapter is also about how to make the difference between when to invest and when not to invest. Pabrai shares his own list of « no go » questions that need to be answered positively before going forward in the buying process: how understandable is the business ? Can you estimate with a high degree of confidence the intrinsic value of the business ? Is there a wide margin of safety ? What’s the downside risk ? Is the management « able and honest » ?

Those are basic questions. Well value investing is pretty much basic, there are no complex mathematical models. It’s more a discipline of the mind to ask the right questions, gather the adequate facts and take disciplined investment decisions whatever the market and people around us say.

To me, Pabrai’s book has the same « revealing truth » qualities as Ben Graham’s Intelligent Investor or Seth Klarman’s Margin of Safety. These books have immeasurable value to investors and should be the bedrock of anyone’s investment philosophy.

Mr Pabrai, my hat to you. Thank you so much for having written this book !

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