Hi there!
If you’re an investing enthusiast looking for wisdom from the greats, today is your lucky day!


In the next tweets, I’ll give you a summary of @MohnishPabrai’s famous book, The Dhandho Investor!

Where ‘Dhandho’ is Gujarati for "endeavours to create wealth."

The book starts with 4 stories of “low-risk, high-return” business endeavours, exemplifying the Dhandho thinking. The “Heads, I win; tails, I don’t lose much!” approach.

The best story is on why the Patels got into the motel business; and later went on to dominate it.

In 1973, US was in a recession; & real estate prices were low.

At the time, thousands of Patels left Uganda after it became dictator-run; and came to the US as refugees.

They saw the motel business as a way of making a living, while getting free family accommodation.

Their options:


A. Two elders of the family work at minimum wage ($1.6 per hour) ⇒ annual earning ~ $6,000.

B. Borrow $50,000 from the bank. Buy small motel. Whole family helps in running it (no hired staff needed) ⇒ annual earning ~ $15,000. Pay off the bank in 3-4 years

Motels being an age-old business had predictable earnings, barring a prolonged recession.

In which case, the bank would take over the motel, and the family could go back to working on minimum wage.

Thus, option A was worst case scenario.

They took the plunge!

No hired help + meticulous accounting record, equalled low operating expenses
This became a cost advantage over the competition
& gave them the ability to offer low prices
Resulting in higher occupancy rates
& thus, super-normal profits
Which brought expansion opportunities

The other three stories are about —
- How a gas station worker became a hotelier,
- How Richard Branson (founder of Virgin group) started an airline business with almost no capital, &
- How Lakshmi Mittal used his business acquisition savvy to build a massive steel empire.

Key learnings —
- work hard, save all you can, & bet big when offered no-brainer bet
- with creativity, one can start virtually any business with minimal capital
- Try to pay less than value

Next, the book delves into the nine principles that constitute the Dhandho Framework!

One, Invest in Existing Businesses (via stock market)
Why?
- no need to manage operations
- partake in profits; keep capital liquid
- market irrationality gives good buying & selling opportunities
- start with little capital
- access 1000s of businesses
- low transaction costs

Two, Invest in Simple Businesses (with ultra slow rate of change)

Write down the business model & why you want to invest, in a short paragraph. If it takes longer, that’s a

Since change is the enemy of investments. Look for mundane products that everyone needs.

Three, Invest in Distressed Businesses in Distressed Industries

Markets aren’t efficient all the time.
A Dhandho Investor uses these vacillations between fear & greed to find bargains.
A great buying price, even with a mediocre sale price, gives a good return!

Four, Invest in Businesses with Durable Moats

“The key to investing is not in assessing how much an industry is going to affect society,
or in how much it’ll grow,
but in its competitive advantage (moat) over its peers,
and above all the durability of that advantage.”

Five — Few Bets, Big Bets, Infrequent Bets

In investing, there are no sure bets. But, to be a good capital allocator, you have to think probabilistically.
The wise ones bet big when they have the odds. And the rest of the time, they don't. It's just that simple.

Six, Fixate on Arbitrage

It’s important to recognise though, that with time, all arbitrage spreads close.
But that’s enough time to invest and make a decent return.
Our job is to have some perspective whether that spread will last for 10 months or 10 years.

Seven, Margin of Safety — Always!

The bigger the discount to intrinsic value, the lower the risk, and the higher the return.
Use a DCF (see attached thread) to compute intrinsic value;
when Price < Value ⇒ Buy! https://twitter.com/10kdiver/status/1292130833273257984

Eight, Invest in Low-Risk, High-Uncertainty Businesses

Markets get confused between risk and uncertainty. And we can profit by finding such companies.

While entering the Motel business, the Patels faced with high uncertainty; but low investment, meant low risk.

& finally, Nine, Invest in copycats rather than the innovators

Patels own more than half the motels in USA. The Patels that came after, saw their predecessors running motels successfully.
And they just cloned them.
From an investing standpoint: Cloning > Innovating.

The book concludes by sharing three key pieces of wisdom, namely —

One, *on selling*
Have an exit plan before entering an investment.
Make a rule, not to sell an investment at a loss within two to three years. Unless, Current Intrinsic Value < Current Market Price.

Two, *on index investing*
Investing through indexes is the best way to go for investors who do not want to do the heavy lifting of security analysis.

Three, *on focus*
Investors should study only one company at a time.

Couple of additional points:

Mohnish has admitted more recently that it’s best to hold the really great businesses even beyond intrinsic value, or even forever... till they stay as great businesses.

The book extensively uses the Kelly’s formula to ascertain the maximum capital to invest in one company.

But, Mohnish has later stated that he’s stopped using the Kelly’s formula.

If you want to learn about it, see the attached thread by @10kdiver. https://twitter.com/10kdiver/status/1264622960427429888?s=20

I hope you enjoyed reading this summary of, ‘The Dhandho Investor’. My full article on it is linked below.

PS: I wholeheartedly recommend reading the book for a better understanding of its concepts with relevant examples. https://twitter.com/GetSTEBI/status/1349333457273376773?s=20