The Dhandho Investor

By Monish Pabrai

Original Publication Date2007
TopicsValue Investing, Betting,
Similar TitlesEducation of a Speculator
Works from Same Author

This book begins with the incredibly inspiring story of the Patels, a group who, after being kicked out of Idi Amin’s Uganda in the early 1970s and thrived – now owing half of all motels in the country. Their Ugandan property was sized without any compensation or recourse, so they came to America with nothing. As it happened, their arrival coincided with a slump in the motel industry and many noticed that purchasing cheap (often foreclosed) motels solved several problems for them:

  1. They could live in their own motels, thus eliminating rent expenses
  2. They could work in their own motels – given that most of them had poor English skills at the time, their alternative generally would be minimum wage jobs. However, many of them already had hospitality skills from their former lives in Uganda, making the motel business somewhat familiar.

Supplying the labor themselves gave the Patels significant pricing power over competing motels and often afforded them favorable financing terms with banks, who generally required them to put up as little as 5%. While failure in the motel business would lead them right back to where they started (minimum wage jobs until they could save enough to try again) success offered substantial upside. That’s the story of this book: look for bets with this characteristic: “heads I win, tails I don’t lose too much”.

The Patels were able to able to build a substantial empire in a business that many regarded as unglamorous, risky and out of favor. They made cleverly structured bets that allowed for unlimited upside potential, but minimal downside risk. Be like the Patels.

As Pabrai frames it, the most important aspect of the above is the attitude of “what have I got to lose here?” He uses several other cases (Richard Branson, Lakshmi Mittal) to drive home the main tenets of Dhandho, which are as follows:

  • Buy existing businesses. Starting a business is hard, even more so if it’s new or novel. Why take the risk? Stock markets provide easy access to a plethora of businesses which are already up and running.
  • Focus on SIMPLE businesses. Preferably businesses that have been around a long time. The Patel/motel example is perfect in this case: People need places to stay when travelling (and age-old problem), the Patels have space on offer. If they can rent their space at less than it costs to operate/maintain, they make money. Simple.
  • Buy when there’s “blood in the streets”. When emotion takes hold and people irrationally lose faith in age-old businesses, it might be time to get interested.
  • Look for a competitive moat
  • Arbitrage is often a good basis for a business
  • Buy at a discount to Intrinsic Value
  • Look for low risk, High uncertainty businesses. Not sure if I hold exactly the same views as the author on this one, but here’s my take: The goal is not necessarily to seek out “high uncertainty” businesses for the sake of themselves, but more to use perceived uncertainty as a tool to help identify value. Humans hate uncertainty, both consciously and sub-consciously, and thus established businesses in areas where uncertainty is high, particularly for isolated or acute reasons (rather than structural ones) are probably a good starting place. More important to me, however, is the “LOW RISK” part of the statement. The idea here is to firstly, look for circumstances where the consequences of being wrong or failing are relatively benign, and ideally known relatively quickly and secondly, where there is large upside potential. Head I win, tails I don’t lose too much.
  • Copying > innovating. Pretty self explanatory but warrants repeating as I note a consistent willingness to overcomplicate things when it comes to investing. There are many successful investors who openly talk about what they do and how they do it, so why reinvent the wheel? When it comes to styles like long-term value investing, we can even get reasonably up-to-date information as to exactly what guys like Warren Buffet are holding (see here). The game is hard enough as it is so at least start with something tried and true and then, if you’re met with success, maybe it makes sense to innovate on top of what you’ve already learned… but probably not before.

The inspiring stories in this book are all about conveying simple, common-sense ideas. For those interested in the nuts and bolts and the implementation of common-sense, it’s a great read, but if you just want the main take-aways (which while well delivered here, are certainly not unique to this book) all you need to remember is this: Head I win, tails I don’t lose too much.