My learnings from “The Dhandho Investor”

In this blog post, I will share my learnings from the book “The Dhandho Investor” written by famous value investor Mr. Mohnish Pabrai.

Abstraction

“Abstraction” in Wikipedia.

Abstraction in its main sense is a conceptual process by which general rules and concepts are derived from the usage and classification of specific examples, literal (“real” or “concrete”) signifiers, first principles, or other methods.

I have always been fascinated by the power of “Abstraction“. Several related concrete examples and use cases can be unified under a generic abstraction.

I am a software engineer by profession and, I have encountered a few powerful abstractions like:

  • Abstractions in Object Oriented Design patterns – Design Patterns: Elements of Reusable Object-Oriented Software  is one of the best books that I have read in software engineering where it discusses about recurring solutions to common problems in software design. Each design pattern is applied over and over again to several concrete examples.
  • Abstractions in Functional programming – I have been learning functional programming for the past couple of months and there again I am seeing generic abstractions like Monoids, Monads and Applicatives which are used over and over again in various concrete applications.

Dhandho

Excerpt from “The Dhandho Investor”

Dhandho (pronounced dhun-doe) is a Gujrati word. Dhan comes from the Sanskrit root word Dhana meaning wealth. Dhan-dho, literally translated, means “endeavors that create wealth”. The street translation of Dhandho is simply “business”. What is business if not an endeavour to create wealth?

However, if we examine the low-risk, high-return approach to business taken by the Patels, Dhandho takes on a much narrower meaning.

The key abstraction, that Mr. Pabrai points out across various examples is the “Low-risk high-return” approach.

Excpert from “The Dhandho investor”

If an investor can make virtually risk-free bets with outsized rewards, and keep making the bets over and over, the results are stunning.

The entire book revolves around this simple yet powerful abstraction, “low-risk, high-return” approach.

This key point of minimising risk triggered a few associations in my head:

Warren Buffet said

Rule No.1:  Never lose money. Rule No.2: Never forget rule No.1.

In a fascinating interview of Professor. Sanjay Bakshi done by Mr. Vishal Khandelwal, professor talks about minimizing permanent loss of capital. The best/magical line to me is

The below excerpt can be found here, value-investing-sanjay-bakshi-way-part-3

So, in a sense, one could get exposure to positive black swans embedded in the drug pipeline business of Piramal Healthcare (Taleb) by making a sidecar investment alongside a man with great capital allocation and complementary skills (Zeckhauser) on extremely favourable terms (Graham) and have practically no risk of permanent loss of capital (Buffett).

I was more than convinced, that “low-risk” is a very important component to factor in making investing decisions.

Real world examples for “Low-risk high-return” approach

With the key abstraction being set, Mr. Pabrai talks about 5 real world examples like Mr. Patel, Mr. Manilal, Mr. Virgin, Mr. Mittal and himself. The wonderful thing about all these examples are how the same abstraction of “low-risk high-return” approach is being clearly visible in all these cases.

This reminded me of the “latticework of mental model”, which one should possess where real world examples can be mapped back to the fundamental models that we should possess:

Excerpt from Mr.Charlie Munger’s Elementary worldy wisdom

What is elementary, worldly wisdom? Well, the first rule is that you can’t really know anything if you just remember isolated facts and try and bang ’em back. If the facts don’t hang together on a latticework of theory, you don’t have them in a usable form. You’ve got to have models in your head. And you’ve got to array your experience—both vicarious and direct—on this latticework of models. You may have noticed students who just try to remember and pound back what is remembered. Well, they fail in school and in life. You’ve got to hang experience on a latticework of models in your head.

I got a mental model out from the first few chapters which is “Dhandho – low risk high return approach”.

Dhandho framework

We have the abstraction of “low-risk high reward” but what is the framework/tools I would use to apply this to the investing world? Mr.Pabrai talks about the Dhandho framework which are listed below:

  1. Focus on buying an existing business
  2. Buy simple businesses in industries with an ultra-slow rate of change
  3. Buy Distressed business in distressed industries
  4. Buy businesses with a durable competitive advantage – THE MOAT
  5. Bet heavily when the odds are overwhelmingly in your favour
  6. Focus on arbitrage
  7. Buy businesses at big discounts to their underlying intrinsic value
  8. Look for low-risk, high-uncertainty businesses
  9. It is better to be a copycat than an innovator.

It could see a strong correlation between the 4 filters which Mr. Warren Buffett and Mr.Charlie Munger used to run Berkshire Hathaway. In the below video, Munger talks about the 4 filters.

4 filters mentioned by Mr. Munger in the interview is mentioned below

  1. We have to deal in things that we are capable of understanding
  2. Once we are over #1, Look for business with intrinsic characteristics, that gives durable competitive advantage
  3. Once we are over #2, Look for management in place with a lot of integrity and talent
  4. Once we are over #3, No matter how wonderful the business is, it is not worth an infinite price. We have to have a price that makes sense which gives a margin of safety considering the natural vicissitudes of life.

Cloning

Mr. Mohnish Pabrai talks about the power of cloning and cites 3 case studies Mcdonald’s, Microsoft, Pabrai Investment Funds. Many times, Mr. Pabrai mentioned that he cloned a lot of ideas from Mr. Warren Buffet and Mr. Charlie Munger. I am more than convinced that “Cloning is a powerful mental model and it works for sure when we clone from the best”.

If I have seen further than others, it is by standing upon the shoulders of giants. – Sir Issac Newton

Wonderful connections from Mahabharata

When I was a kid, I was fascinated by the great Indian epic “The Mahabharata” and the fascination continues to this day. Mr. Pabrai provides a framework for buying/selling a stock by associating Abhimanyu, who was a warrior who knew how to enter a Chakravyuh but not to exit out, as a result got killed in the battlefield. Mr. Pabrai touches a very important point, where an investor should have a framework for both entering into an investment as well as exiting out. He also talks about the importance of being laser focussed when we are making an investing decision by citing Arjuna, who was regarded as the greatest warrior.

Giving it back

Excerpt from “The Dhandho Investor”

I do urge to leverage Dhandho techiques fully to maximize your wealth. But I also hope that, well before your body begins to fade away, you will use some time and some of that Dhandho money to leave this world a little better palce than you found it. We cannot change the world, but we can improve this world for one person, ten people, a hundred people, and maybe even a few thousand people.

Mr. Mohnish Pabrai has a foundation called “Dakshina Foundation” for giving it back to the society.

Website to Dakshina Foundation http://www.dakshana.org/

Dhandho – For LIFE (My own subjective thought., and not from the book)

I was fascinated about “Low-risk high-reward” approach for investing that was discussed right throughout the book. I was thinking whether I can apply “Low-risk high-reward” approach for LIFE in general. To me, “Dhandho – For LIFE” is an endeavour to live a happy life., I would like to consider the below points as risky and would like to keep them as low as possible.

  1. Being Unhealthy is a huge risk – I lost my mother due to cancer when I was 9 years old and my dad suffered a brain hemorrhage within the next six months. It took more than a decade for our family to get back to normalcy. It was a random event(negative black swan event) for sure, but the important point to remember is having a good health is extremely important which is often discounted in this fast paced world. We should atleast do the things which we can control like having a balanced diet, do exercise regularly, avoid other bad habits, be thankful and hope for the best.
  2. Being in Debt is a huge risk – As mentioned in #1, inspite of the negative black swan event that occured to our family, we were in a way lucky because we did not incur a huge debt. So I would like to keep the debt as low as possible, if possible eliminate it.

    Rather go to bed supperless, than rise in debt – Benjamin Franklin

  3. Possessing Envy/Jealousy is a huge risk – I would like to be contented with what I have and not forced to do any action just because someone else is doing it. Not to fall for “Social Proof” especially when making big financial decisions.

There will definitely be many more points but the key to do “Dhandho – For Life” is to keep major risks as low as possible. This section about “Dhandho – For LIFE” is a very subjective thought and not mentioned in the book.

Final thoughts

It was one of the best books that I thoroughly enjoyed reading. I have listed some of the points in this blog which I considered as important to me from the book., There are many more wonderful concepts in the book which I have not listed here. Also it is not just a book on value investing but it touches on a lot of simpler yet powerful ideas that one can adopt in their life. I have become a huge fan of Mr. Mohinish Pabrai and I will try my best to clone some of his great qualities.