The dhandho investor pdf
Pabrai likens investing to blackjack, in that we must think about our edge and odds. To be successful, we have to make high quality bets when the opportunity arises. Good investments ideas are far and few between. Just because the market is usually efficient doesn’t mean the market is always efficient.
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Pabrai notes that this has been the case historically, even after the Fall of France, Korean War, Arab oil embargo, Nixon’s resignation, 1987 financial panic, 1997 Asian stock market crisis, the Russian LTCM crisis, and so on. However, prices should return to rational levels over the long-run. Yes, stock prices can and will deviate from intrinsic value when humans succumb to periods of extreme greed or fear.
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The larger the discount to intrinsic value, the lower the risk and the higher the expected return.ĭo remember that markets are based on an aggregation of auction pricing mechanisms. Margin of safety: As we’ve noted, Pabrai looks for businesses that sell for much less than his estimate of its conservative worth.It is wise to think like a business owner and not a ticket holder when making long-term investment decisions. Its value is based on the amount of cash that comes in and out. Business owner: A stock represents a piece of a business.Unlike baseball, there are no strikes when you decide not to swing. Mr Market: The stock market is there to serve the investor.If the principles above weren’t a clear enough sign already, Pabrai highlights several concepts from Graham and Buffett that he found valuable: “Heads, I win… Tails, I don’t lose too much” Mohnish Pabraiīenjamin Graham and Warren Buffett had strong influences on Mohnish Pabrai’s investment philosophy. To paraphrase Charlie Munger, investing involves looking for mispriced gambles and knowing when the gamble is mispriced. Bet heavily when the odds are very much in your favour.The larger the margin of safety, the lower the risk of loss on capital. Benjamin Graham once referred to this idea as the margin of safety. Buy businesses at large discounts to its intrinsic value.My point is to be careful with blanket application of principles) For example, we might classify low-risk companies that focus on excellent customer service as innovators. (Remember that this principle is in reference to high-risk ventures. These companies tend to carry lower risk and yield greater rewards. By contrast, it is easier to choose good companies that can execute, lift and scale a combination of existing ideas. Pabrai believes that finding and investing in excellent innovators is difficult. Companies with durable and widening advantages can generate better returns on invested capital over the long term. This is a reminder to focus not only on company growth, but on the durability and magnitude of its competitive advantage. Buy businesses with durable and widening competitive advantages.Is the business truly simple if it is in distress? This is where judgement and experience comes in.) (Note that this principle may conflict with the one above. This rule may also apply to stocks in temporarily distressed countries, but investors should treat country-risk with even greater caution. The odds of buying stocks at large discounts to its intrinsic value are higher here. Buy temporarily distressed businesses in distressed industries.If your thesis requires more than a paragraph to defend, and requires sophisticated financial models, it’s probably a red flag, at least in Pabrai’s eyes.
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When it comes to buying and holding, simple tends to mean less stress. Sometimes, it’s easier to look for investment opportunities in mundane products and services that everybody needs. Intense competition, capitalism and change can be rough on investment prospects. Buy simple businesses in industries with a slow rate of change.Such businesses are usually less risky than an unproven start-up. Buy existing businesses with a proven business model and history of operations.With this in mind, Pabrai outlines several core principles to Dhandho-oriented investing: Buy existing, simple and distressed businesses He describes compounding as a snowball effect that can lead to amazing results over time. To Pabrai, Dhandho is about the maximisation of rewards and the minimisation of risks. The Dhandho frameworkĭhandho is a Gujarati word that means “endeavours that create wealth”. In this post, I will summarise the key lessons that I took from Pabrai on value investing and capital allocation. For the curious, there’s much to learn about his philosophy and temperament in his book, The Dhandho Investor, which I found an insightful and accessible resource. One striking feature of his methods, amongst many, is his willingness to hold a concentrated investment portfolio, even by value investor standards. Mohnish Pabrai, managing partner of Pabrai Investment Funds, is a more prominent value investor.