Book Summary #1 — The Dhandho Investor: The Low-Risk Value Method to High Returns

The Dhandho Investor

As the name suggests, The Dhandho Investor: The Low-Risk Value Method to High Returns highlights various ways to earn great returns with very low downside potential. “Heads I win, Tails I don’t lose much”

The book is written by Mohnish Pabrai, one of the most successful investors in markets all across the globe. It shares various principles that help in understanding the basics of getting high returns on our investment.

1. FOCUS ON BUYING AN EXISTING BUSINESS- Mohnish starts by explaining how Patels bought motels in USA, a well-defined business model. It is way less risker than starting a startup with an absolutely new and untested idea.
2. BUY SIMPLE BUSINESS WITH ULTRA SLOW CHANGES IN THAT INDUSTRY- This idea is similar to the investing strategy of legendary investor Warren Buffett. Invest in simple business which even a fool can run rather than investing in a business that requires high skills to operate. Businesses like IT and banking require highly skilled people to run them as well have changed dramatically over last 2 decades. Mohnish asked us to avoid such businesses.
3. BUY DISTRESSED BUSINESSES IN DISTRESSED INDUSTRIES- In 1970s the motel business was highly distressed because of the high oil prices, there were fewer travelers on highways which led to this distress. The patels bought this business at a highly discounted value which was beneficial for them as the situation came back to normal. “Be greedy when others are fearful, be fearful when others are greedy.
4. BUY BUSINESSES WITH A COMPETITIVE ADVANTAGE (MOAT)- Mohnish explains this with the same example of Patel’s Motel business. Other motels had to keep workers for room service and other activities whereas the family members of Patels used to do this in their motel which saved cost of employees. Apart from this the family would stay together in the same motel which even reduced their expenses of rent. This creates a great competitive advantage as motel rooms now can be rented on cheaper value.
5. BET HEAVILY WHEN ODDS ARE OVERWHELMINGLY IN YOUR FAVOUR- After Patels saw that they can rent their motels at prices lower than their competitors, they even bought motels which were bankrupt from banks by paying a very low price and taking the rest as a loan. This enabled the Patels to earn a high amount of return on their investment at a very low risk of losing just the money put by them in the business.
6. FOCUS ON ARBITRAGE- The book explains how arbitrage can help a business grow immensely. For example how GEICO sells its policies directly to its customers in the auto segment which saves around 15% of the operating expenses which it can directly transfer to its end users creating an arbitrage for the customers and obviously greater GEICO auto insurance demand.
7. ALWAYS HAVE A MARGIN OF SAFETY- The more discount you get on an asset, greater is the margin of safety. Mohnish asks its readers to buy the asset significantly below its intrinsic value and its expected future cash flow which automatically will give you great returns over a period of time. It will also ensure that you will lose less if the bet goes against you.
8. INVEST IN COPYCATS RATHER THAN INNOVATORS- Last but not least, Pabrai asks investors to invest in copy cats rather than innovators. Innovators have to spend much of their time, effort, and money trying to find new things but replicators just have to replicate with very little effort and money. He gives examples of some of the biggest companies like Microsoft and McDonalds. He even states that he has been copying the ideas and investment strategies of Warren Buffet’s Berkshire Hathaway. He considers Warren as his guru and replicates his investment strategies.

According to the author, all these principles will help an investor understand get handsome returns over his/her investment over a long period of time.

THE DHANDHO INVESTOR is an amazing book which deepens the understanding of investing principles. It uses extremely lucid language which expresses difficult concepts about stock analysis and investment in reader-friendly manner. Also, the book engages and astonishes the reader as it unveils various aspects of rational thinking.

A must-read book for all investors out there!!!