Mohnish Pabrai has high esteem for Warren Buffett and admits that his investment style is reproduced from Buffett and many others. He’s written a book on his investment style: Mohnish Pabrai The Dhandho Investor – Heads I win, Tails I Don’t Lose Much: he quotes “Entrepreneurs are great at dealing with uncertainty and also very good at minimising risk. That’s the great classic entrepreneur” Managing Risk [Crucial] to the extent, deliberate, minimisation of the exposure is the key. Back in June 2007, he made headlines by bidding US$650,100 using Guy Spier to get a charity dinner together with Warren Buffett.
Back in June 2007, he made headlines by bidding US$650,100along with Guy Spier to get a charity dinner together with Warren Buffett.
- 1 The Dhandho Investor: The Low-Risk Value Method to High Returns
- 1.1 Rule # 1: Lookout for Already Existing Business
- 1.2 Rule # 2: Few Big Unique Bets [Bet Heavily When Odds are Overwhelmingly in Your Favor.
- 1.3 Rule # 3: Invest in distressed businesses in distressed Industries.
- 1.4 Rule # 4: Invest in business with durable moats
- 1.5 Rule # 5: Invest in simple enterprises
- 1.6 Rule # 6: Margin of safety – Most Important [Big Businesses at Big Discount to their Underlying Intrinsic Value]
- 1.7 Rule # 7: Fixate on arbitrage
- 1.8 Rule # 8: Invest in low-risk, high-uncertainty businesses
- 1.9 Rule # 9: Prefer Copycats over Innovation
- 1.10 Concluding
The Dhandho Investor: The Low-Risk Value Method to High Returns
Time and time again when I read the book there is always something new to learn, simplicity, which is not hard to understand, easy to remember: Unique bets, Simple Business[…], Durable Moats, Copycats[…], Margin of Safety[…] etc.
Formula Is: Low-Risk High Return
There are few rules that you get to learn, e.i. emphasised in the book; I am going to give you a brief. The strategy (or strategies), according to Mohnish Pabarai, it’s classic “[H]eads I Win, Tails I Win”. Reading this could Inspire you.
It’s not without reason Simplifying Finance says 4 value Investors you can Learn from.
Let’s go through the point in detail.
Rule # 1: Lookout for Already Existing Business
Here he gives how motels industry was developed in the America, who played a major role; how it all started. “Patels” are the one who started. They found the business which already existed. Well-defined business mode, less Risky, with huge opportunity for operational optimisation.
They are the major player in the Motel industry in the US. This brings us to rule no one, look out for existing listed companies. Companies which have: History, Vision, Mission, Family Business[…], Established, Industry Experience of Ups and Downs[..], etc.
Rule # 2: Few Big Unique Bets [Bet Heavily When Odds are Overwhelmingly in Your Favor.
It simply says prefer quality over quantity, Remember! Intraday Post, Facts of Investing, invest only when you have high conviction on the company, just like Papa Patel’s motel where they invested their entire amount to start a motel.
Have concentrated their capital with their bets. You are confident that the odds are in your favour, Less Risk, rare opportunity then you have no reason to avoid. Have fewer investments which are accessible. And invest heavily in those businesses.
Rule # 3: Invest in distressed businesses in distressed Industries.
“The entrance strategy is more is actually more important than exit strategy” – Warren Buffet
If you read chapter 1, he has mentioned about, oil embargo, deep recession, and reduction in consumer discretionary spending, highway motels where suffering. Examples given in the book, Papa Patel’s entry in the motel during such a bad time for the industry, Manilala entered travel business immediately after 9/11 incident.
An investor can pick up assets at a deep discount. This lesson can be best learnt from The Lakshmi Mittal.
Your opportunities lookout should start with distressed industries.
Rule # 4: Invest in business with durable moats
Phil Town explains it right, “A moat is obviously the water around a castle but in investing terms, a moat is the durable competitive advantage that a company has that protects it from being attacked by competitors.”
Learn more about different Moats
Out of all the Moats: Financial, Branding[…], Costing, Technology[…], etc.; lookout for sustainable and long living moats. This is how SWOT Analysis will play a major role in analysing your strategic moats and how to use this to our advantages.
Rule # 5: Invest in simple enterprises
Do you understand the business you are investing in? The only thing which is permanent is Change.
We see change as the enemy of Investment… so we look for an absence of change; We don’t like to lose Money. Capitalism is brutal. We look at mundane products that everyone needs. – Warren Buffet
In words of Monish Pabarai, “[P]apa Patel as long as human travel long distance, they will need to sleep, refresh, eat & rest; Motels is always going to be needed.
Rule # 6: Margin of safety – Most Important [Big Businesses at Big Discount to their Underlying Intrinsic Value]
The margin of safety ensures, “Heads I win, Tails I Don’t Lose Much”; once you enter a stock when an industry is distressed it already takes care of this part. Wait!, to reduce the downside risk evaluate Graham’s “margin of safety“, before ever looking at upside potential.
Rule # 7: Fixate on arbitrage
Arbitrage, it is a huge topic. It is an opportunity to exploit the difference between different financial instruments. When the arbitrage opportunity is small, free flow of funds, this is virtually free cash to profit from.
You can play arbitrage, in different forms, rightly calculated you just cannot lose. One of the amazing company that has grown with such an opportunity is Infosys, pure arbitrage play, people betting heavily on Infosys understood arbitrage better than everybody else.
In this case, even if the opportunity does not exist in a distressed industry the margin of safety is taken care of.
Rule # 8: Invest in low-risk, high-uncertainty businesses
Low risk investing, by definition, means having a very low downside. Papa Patel had invested the entire sum of money into owning the motel, low risk, high certainly that when travellers will come high uncertainty.
With a low cost of operation, the downside of the business is very limited; with uncertainty to revenues or profitability. This is a deadly combination when later, works in our favour returns are virtually limitless on the upside.
Rule # 9: Prefer Copycats over Innovation
No Brainer business models look naive, but simply following the path already laid down by others is easier.
Innovation has its costs, high risk is also involved. You cannot be putting your entire sum into innovation where the chances of success are based on high probability.
Returns on Investments doesn’t understand if the business is complex or no-brainer. Tremendous potential can arise of even no-brainer business models since the fundamental of its functioning is already laid out.
Mohnish Pabrai is one of the Top Wealth Wizards which follow Keep It Simple.
Ever since I saw Mohnish Pabrai’s Google Talk on Youtube, I started following him.
50 something Indian-American entrepreneur and investor, beaten S & P 500 returns, “Alpha Returns”, ever since started from 1999.
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