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The Dhandho Investor – Book Summary

Principle of Manilal Dhandho:

Heads I win; tails I don’t lose much!

– Mohnish Pabrai, Founder, Pabrai Funds.

Principle of Virgin Dhandho:

Heads I win; tails I don’t lose much!

– Mohnish Pabrai, Founder, Pabrai Funds.

Principle of Mittal Dhandho

This chapter talks about the business principles Marwari community from Rajasthan India. It then talks about how Lakshmi Mittal, a Marwari businessman, went from nothing to a billionaire.

When Mohnish asked a good marwari friend about how the stereotypical Marwani approaches investing capital in ventures, here is the answer he got:

He said quite nonchalantly, that Marwari business people even with only a fifth-grade education,

  1. Simply expect all their invested capital to be returned in the form of dividends in no more than three years.
  2. They expect that, after getting their money back, their principal investment continues to be worth at least what they invested in it.
  3. They also expect these to be ultra low-risk bets.

According to author Mohnish Pabrai, if you use the above principles to conduct your business, you will be assured of two things:

  1. You’d take a quick pass on most investments offered to you and
  2. Starting with very little capital, after a few decades you will be very wealthy.

Enough said.

Once again the magic word is Dhandho, a huge upside with virtually no downside. It is a classic – “Heads I win, tails I don’t lose much!”

The Dhandho Framework

Here are the nine principles of the Dhandho framework:

1. Focus on buying an existing business.

Don’t start a brand new business stop this is much less risky than the startup. Look for an existing business with a well-defined business model and a long history of operations.

2. Buy simple businesses in industries with an ultra-slow rate of change

Change is the enemy of investments, so we look for the absence of change. We don’t like to lose money. Capitalism is brutal. We look for mundane products that everyone needs

– Warren Buffett

3. Buy distressed businesses in distressed industries.

Mittal, Papa Patel, Manilal all bought assets at huge discounts which had a history of great operations.

Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.

– Warren Buffet

The entrance strategy it’s actually more important than the exit strategy.

– Eddie Lampert

I will tell you how to become rich. Close the doors. The fearful when others are greedy. Be greedy when others are fearful.

– Warren Buffet

4. Buy businesses with a durable competitive advantage – The Moat.

The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products and services that have wide, sustainable moats around them are the ones that deliver rewards to investors.

Warren Buffet

I don’t want an easy business for competitors. I want a business with the moat around it. I want a very valuable castle in the middle and then I want the duke who is in charge of the castle to be very honest and hard-working and able. Then I want a moat around that castle. The most can be various things: the moat around our auto insurance business, GEICO, is low-cost.

Warren Buffet

5. Bet heavily when the odds are overwhelmingly in your favor.

Charlie Munger, uses horse racing’s pari-mutuel betting system as one of his mental models when approaching investing in the stock market. Frictional costs, relative to the stock market are very high. According to Munger:

To us, investing is the equivalent of going out and betting against the pari-mutuel system. We look for the horse with one chance in winning which pays you three to one. You’re looking for a nice price to gamble. That’s what investing is. And you have to know enough to know whether the gamblers mispriced. That’s the value investing.

Charlie Munger
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