9 Business Tips in 2023 from The Book Dhando Investor

This blog will discuss the top 9 tips and takeaways from Mohnish Pabrai’s investment how-to book Dhando Investor. Pabrai is a legendary value investor who generated a cumulative return of 517% from 2000-2013, which is higher than the S&P 500 Index’s cumulative return of 43%.

He currently has Pabrai Funds closed to new investors, but you can learn how to invest like him by learning how he invests. In this book, The Dhando Investor, he explains his entire approach. If you want to learn some tips and tricks that will help you turn a small amount of money into a fortune, with low risk, then read on!

What is Dhandho Investor?

Mohnish refers to the Dhando method as an investing strategy that offers little risk and large returns. Additionally, he provides numerous instances from everyday life in the book to demonstrate the efficacy of the Dhando approach. The tale of the Patels is among his most impressive examples of the Dhando method in action. The Patels are a tiny ethnic Indian group that arrived in the United States in the 1970s with nothing and went on to become the largest motel owner in the nation by applying the Dhando investment philosophy. How did a poor immigrant family grow their fortunes from nothing to $40 billion over the course of 35 years? The Dhando technique is the answer!

The Dhando approach is condensed into 9 fundamental elements in the book.

Principle 1 – Focus on buying existing businesses

  • Dhando investing can be summarized in this one tagline: “Heads I win, tail I don’t lose much”
  • The investment model of existing businesses, which have a proven business model and a long, stable history of operations, is much less risky than that of startups.
  • Investing in stocks of publicly traded companies is one of the best ways to do so.
  • To recap the first concept of Dhando investment, focus on purchasing existing firms through the stock market.
Principle 2 – Invest in simple businesses
  • The Dhando investor avoids difficult businesses. Why? There’s actually a perfectly logical rationale behind this.
  • You must first understand a business’s inherent value in order to determine if an investment is a good one or not. It’s a terrific bargain if you can acquire the company for less money than it’s worth. A business is not a good bargain if you have to pay more than it is worth.

Principle 3 – Invest in distressed businesses in distressed industries

  • Determining a company’s intrinsic worth has given you a valuable tool for identifying profitable investment opportunities. You want to purchase equities at a discount to their inherent value, much like in the gas station example when you could get something worth $768k for just $500k.
  • The easiest way to do this, in Dhando’s opinion, is to hunt for troubled businesses. Returning to the tale of Papa Patel and his motel investment, he purchased the property in the 1970s, a period of highly turbulent economic conditions. You could buy motels at fire sale prices because the nation was in a severe recession.
  • This is also possible in the stock market. The market can be quite emotional since stock values are so erratic and driven by news headlines. This frequently results in significant deviations between the price of a stock and its intrinsic value. Consequently, your goal is to purchase a stock at a distressed price.
  • This comment from Warren Buffett sums up the third principle of the Dhando investment strategy perfectly: “I will tell you how to become rich… When others are greedy, be afraid. When others are afraid, be greedy.

Principle 4 – of the Dhando investing method is to Buy businesses with durable moats

  • A moat serves as a defence against enemies. A moat was necessary for a fortress in the Middle Ages to keep away its adversaries. The greater the protection, the broader and deeper the moat. The same is true for businesses.
  • Any industry can experience ruthless competition as a result of free-market capitalism. Without some type of competitive advantage, a company will quickly go out of business.
  • How can we be certain that a company has a moat? The financial statements are available for review. A company with a substantial moat will see significant capital returns. This indicator reveals how much revenue a company is making with the capital it has invested.
  • Coca-Cola, Google, Harley-Davidson, and American Express are a few examples of businesses with moats. Brand recognition, a price advantage, economies of scale, and many more factors can all be used as moats. 

Principle #5 The Dhando method’s fifth rule is to bet significantly when the chances are strongly in your favour

  • The fifth rule of the Dhando method is to wager heavily when the odds are clearly in your favor.
  • In the case of the Patel motel, the Patels recognized an opportunity with a huge upside and a tiny downside, and they seized it. They had the chance to purchase a motel with just $5,000 of their own money, borrow the rest, and possibly turn a tidy profit. The odds were so good that they decided to go all in even though $5k was all they had saved up in their lives.
  • Mohnish advises placing a HEAVY bet if you come across a company with a straightforward business plan and a solid moat that is momentarily in trouble and whose stock price has fallen so far that you can purchase it for less than half of its actual worth. Because of the great likelihood of enormous success and the extremely low likelihood of moderate failure with such a configuration. The main focus of the Dhando framework is calculating the chances. The intelligent ones, as Charlie Munger, memorably put it, “bet big when they have the odds. They don’t the rest of the time. That’s how easy it is.
  • The Kelly Method, a straightforward mathematical formula that specifies exactly HOW MUCH of your money to gamble on any investment opportunity, is also explained by Mohnish in the book. The odds-based algorithm was made well-known by Ed Thorpe, an MIT math professor who employed it to profit handsomely while playing blackjack in Las Vegas casinos. The key takeaway from this fifth Dhando investing concept is that, even if investing is not the same as playing blackjack, it is still important to think probabilistically and place large bets when the odds are in your favour.

Principle 6 – is to Focus on arbitrage

  • A fancy phrase for riskless profit is arbitrage. If gold is trading for $600 per oz in London and $610 per oz in NYC, for instance, you may buy it in London and sell it in NY at a profit. This is an example of arbitrage.
  • Then there is arbitrage done in the Dhando style. The Patel motel is a prime illustration. The Patels practically had no overhead since the entire family resided and worked in the motel. Since there were no salaries to be paid, they could offer rooms for the lowest possible costs while yet making a healthy profit. They possessed an arbitrage advantage over all of their rivals. Category-killers like Wal-Mart, Home Depot, and GEICO are more examples of Dhando arbitrage spread in play. Each of these businesses enjoys a special circumstance that enables them to outperform all of their rivals in terms of profitability.
  • In essence, the arbitrage spread is just another word for a moat. The Patel hotel, Wal-Mart, and GEICO are examples of Dhando-style arbitrage spreads that Mohnish advises findings to take full advantage of.

Principle 7- is to Buy businesses at big discounts to their intrinsic value

  • This is often referred to as investing with a safety margin. Recall the example from the gas station. You discovered that you could purchase the gas station for much less than what it is worth after calculating the cash flows and its intrinsic value: a price of $500k vs. the intrinsic value of $768k. Your margin of safety is the difference between the price and the value.
  • Dhando investing instructs you to only purchase businesses at a sizable discount to their intrinsic value because the future is rife with uncertainty and even the most accurate projections of cash flow can be proven to be incorrect. You now have a margin of safety.
  • According to Benjamin Graham, “The objective of the margin of safety is to [make] an exact prediction of the future unnecessary.” To put it another way, investing with a margin of safety shields you from the unforeseen because no one, not even the finest investor, is capable of accurately predicting the future.

Principle 8 – Look for low-risk, high-uncertainty businesses

  • The best Dhando-style possibilities combine tremendous uncertainty with little risk. It is a conservative gamble to make because the risk is low, and the potential reward is great because the uncertainty is considerable.
  • Other combinations are low-risk, low-uncertainty, and high-risk, high-uncertainty. You shouldn’t gamble by making investments in high-risk, high-uncertainty companies. Low-risk, low-uncertainty situations are also undesirable because they do not offer the chance for substantial gains. Therefore, you seek the optimum balance of low risk and high uncertainty.
  • The $5k down investment was the only thing at risk, making the Patel hotel the ideal low-risk, high-uncertainty venture. Therefore, even in the worst situation, there wasn’t much to lose and there was a lot of room for gain. The optimum combination for the Dhando investing paradigm is low risk and great unpredictability.

Principle 9! Invest in the copycats rather than the innovators

  • According to the Dhando framework, scaling an idea that has already been tested is far more reliable than trying to innovate.
  • Other Patel families imitated him and bought their own motels after the first Patel purchased a little motel and had some success. Patels quickly replicated this model across the country because it was a tried-and-true concept with no risk.
  • The statistics show that the copycat method is effective: A Patel owns one out of every five motels in the country. I’d agree this is a fairly excellent tactic if it worked for a tiny number of refugees who came to the U.S. with nothing!
  • Microsoft and McDonald’s are two more instances of wildly prosperous businesses that were copycats rather than innovators.
  • Actually, neither of these businesses had any novel concepts, but they were successful because they were adept at scaling and executing. Ray Kroc, the man behind the creation of McDonald’s, based his eateries on a wildly popular hamburger stand in California. Microsoft did not create its flagship product; instead, it was licensed by a firm called Seattle Computer.
  • Because the Dhando slogan is “Heads I win, Tails I don’t lose much,” Mohnish advises investing in businesses that can successfully mimic a successful business model.

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