Dhandho. Heads I win; Tails I don’t lose much — Mohnish Pabrai
In his talk at Google, Mohnish Pabrai talks about his strategy when looking to invest in a company. Quoting principles from Graham, Buffett and Munger, along with anecdotes from his own life, Pabrai talks about how one should focus on determining the true value of a business before investing in it, rather than focusing on its performance in the stock market.
Pabrai begins his talk with a story about the Patels, who entered the United States as refugees, and with very little money, and ended up dominating the motel business. He explains that they were able to do so through a low-cost form of management, as the labour in the motel was then provided by the families themselves. Through low costs and therefore low rates, they soon bought out their competition. The downside of this investment would be a default on their bank loan, which didn’t lead to their property being seized as banks preferred to let them run the motel and hope for a change in returns in the future. This form of low risk and high uncertainty investing something
which Pabrai himself follows. The same principle is reflected in his book, Dhandho: Heads I win; Tails I don’t lose much. The idea behind the book and the title is doing business which has a substantial upside, accompanied by a non-existent downside.
Pabrai gives another example about a ‘Dhando’ investor; Richard Branson, who also started his airline with the same model of thinking. Before Virgin Atlantic came up, Branson was a music producer and was approached with the business plan of starting an airline. Finding it profitable, he convinced Boeing to lease him an old Jumbo Jet despite not being a regular customer. In the business, the revenue comes in before any costs are incurred, and even if the airline was to fail, his music business could easily cover the losses. Thus again, by placing asymmetric bets, Branson, too, followed the low risk high uncertainty principle of investing. Pabrai highlights that Google follows this
principle in its business as well, as it continually looks to research in projects that don’t cost much if they fail, but they are game changers if they work out. For example, Android, self-driven cars, etc. Another example he gave was that of Bill Gates when starting Microsoft — did not have much to lose as his opportunity cost was low and even if it failed, he could easily go and complete his undergraduate; therefore, low risk.
Pabrai adds a note on the importance of Compounding, and how it is a powerful notion that, in sync with the Dhando Framework, that Buffett and Munger have both used to reach the positions they are at. He suggests that by replacing capital with creative thinking, as done by Branson, one can follow the Dhando principle of investing, and to do so, one really needs to understand what they are investing in (and so mainly stay in one’s circle of competence), and ideally be able to explain the reason in 4–5 sentences rather than with spreadsheets.
According to Pabrai, compounding machines, such as Google, which have high growth, high returns on capital and most importantly high absorption of capital it produces, are the holy grail for an investor, even though they might be generally overpriced. He says that investing should be a mix of looking for undervalued stocks along with investing in what seems to be a compounding machine, even if it means paying slightly higher amounts.
