A short-lived arbitrage spread allowed the cable company, CompuLink, to tap into the distribution chain by at all times being one step ahead of their slower-moving, bigger competitors via constantly introducing nimbler cables to vendors until competitors got to catch up with the innovation. A longer-lived example included that of GEICO who reaped a Dhandho arbitrage spread by being first at selling cost-effective all insurance policies using inbound call centers and the internet, giving it a dominating position in auto insurance still maintained today after competitors narrowed the arbitrage spread.
Pabrai states that, due to brutal capitalism, all Dhandho arbitrage situations will eventually be eroded, but two important factors can allow investors to earn excellent returns in the interim: the size of the spread or moat , and its duration.
The moats of these businesses have all pretty much evaporated. But as Pabrai states:. This does not mean these were bad investments. On the contrary, all three have been home runs for Berkshire. They had very robust business models for enough years for Berkshire to generate a spectacular return on its investment. A central theme of the book is the notion that the market often confuses the distinction between high uncertainty and high risk.
But these are exactly the kinds of situations where the market tends to discount businesses below intrinsic value, and where value investors can come in and reap sizable rewards. This was my favorite part of the book. Mohnish uses three brilliantly detailed examples of investments made in the Pabrai Funds where he took advantage of low-risk, high-uncertainty situations to earn spectacular returns, often in a relatively short time. Whether its over-leverage as in the case of Stewart Enterprises, negative industry outlook as in the case of Level 3 Communications, or depressed shipping prices as in the case of Frontline, Mohnish walks the reader through three different miscalculations the market can make when assessing the risk of uncertain circumstances.
When extreme fear sets in, there is likely to be irrational behavior. In that situation, the stock market resembles a theater that is filled to capacity. In the theater called the stock market, you can only exit if someone else buys your seat — each share has to be held by someone! If there is a mass rush to leave the burning theater, what price do you think these seats would go for?
The trick is to only buy seats in those theaters where there is a mass exodus well on its way to being put out. Read voraciously and wait patiently, and from time to time these amazing bets will present themselves. You learn something new every time to reread it just to pound the lessons in. Just great. Like with the Patels, Mohnish argues that in seeking to make investments in the public stock market, one should ignore the innovators and invest in the copycats run by people who have demonstrated their ability to repeatedly lift and scale.
Sam Walton at Walmart was a lifelong, expert copycat of what worked at his competitors and ended up outperforming everyone. In each case, these savvy entrepreneurs took a demonstratively successful idea, improved on it, and scaled it hugely. Now, this is a real gem. Mohnish argues that to become a great investor, one needs a robust framework for both buying and selling and that buying is the easy part of the equation.
How true that is! Selling an investment is much more prone to human irrational behavior in taking a correct decision due to the commitment bias of owning that investment. Seasoned investors have all experienced exactly this problem by either falling in love with a stock or hanging on with a nagging hope. The two families were in a huge battle involving thousands of troops, swords, and elephants.
One of the sides arranged their troops in a spiral formation, a Chakravyuha, which is designed like an Archimedes Spiral wreaking havoc on the opposing army and inflicting staggering losses. But such a traversal would be virtually impossible.
When Abhimanyu was in her womb, Lord Krishna was explaining to her how one enters a Chakravyuha and decimates it. She listened carefully to the first part of the story but fell asleep in the second part about exiting the Chakravyuha, so her unborn baby only heard half the story 2, years ago, they assumed that unborn children could listen to you.
Only when you enter will the real struggles or fruits present themselves. The first point is to only enter an investment if the initial purchase satisfies it being within your circle of competence and if you with a high degree of confidence is able to determine the intrinsic value while buying at a significant discount to that intrinsic value as explained in previous sections.
Should you sell? Furthermore, if after three years the investment has not reached intrinsic value, Mohnish argues that one is likely to be wrong about the estimate of valuation or intrinsic value has decreased, and one should therefore sell. Exceptions might include short term capital gains relevant for U.
Ultimately, if the price rises to or above intrinsic value, the investor should exit the Chakravyuha to look for other opportunities. Abhimanyu faced a difficult dilemma. As a valiant warrior he was left with no other choice than to enter the one formidable Chakravyuha in front of him. He could not time his entry to his advantage, and with no exit plan, his unfortunate fate was sealed.
We have the luxury of choosing just a handful of Chakravyuhas from over 30, over an investing lifetime spanning several decades. Entering these carefully selected Chakravyuhas at times when the soldiers are asleep all but guarantees successful traversals and big rewards. In the last part of the book, Mohnish provides some invaluable resources for value investors to dig into and find opportunities. While the book has been aimed at teaching readers how to maximize wealth, The Dhandho Investor is also about generosity and gratitude to the investment greats who have taught him and to those whom he is now teaching.
Mohnish finds humility to be a bigger path to lasting success and fulfillment. I continue to be amazed by his clarity and life perspective. I wish no one read The Dhandho Investor because it would make my investing competition much more intelligent. Entrepreneurs want their business to be lasting and fulfilling.
The key is in doing deliberate work. Thank you Oliver for the detailed review and your candid perspective of leaving your job as a portfolio manager. Can you please share if author has covered Kellys principle with good clarity in this book. Hey Oliver, you did such an incredible job at summarizing this book. I am a seasoned stock holder now looking to buy my first small business and this post was just the nudge I needed.
Thank you for putting this together! Your email address will not be published. What is Dhandho Investor? And since existing businesses are much less riskier than startups, Mohnish recommends investing only in companies that have a proven business model and a long, stable history of operations. And the best way to do that is via stocks of publicly traded companies. Plus, you can do this with whatever cash you have in your wallet.
As long as you have enough money to buy one share of the company you want to invest in, you can afford an ownership stake in any publicly traded company. This is way more accessible than buying an entire business like Papa Patel did when he bought his motel. So to summarize the 1st principle of Dhando investing: focus on buying existing businesses, and do this via the stock market.
Principle 2 — Invest in simple businesses The Dhando investor avoids investing in complicated companies. In order to assess whether an investment is a good deal or not, you need to first know the intrinsic value of a business. The general formula for estimating what a business is worth — or its intrinsic value — is by adding up all the cash flows discounted at an appropriate interest rate that will occur during the life of the business. This is called a discounted cash flow analysis.
And because these cashflows are future cash flows, they have to be converted into present-day dollars. This is what the business is really worth. So is it a good deal? DCF analysis is hands down the best way to assess investment opportunities, but you can see that estimating future cash flows is not an easy task. When it comes to predicting the future, nobody has a crystal ball. The cash flows of a gas station are a lot more estimable is that even a word? So rather than try to predict the future of complicated companies, the Dhando method wants you to simply avoid those kinds of companies and stick with the ones with relatively predictable, stable cash flows.
Principle 3 — Invest in distressed businesses in distressed industries Now that you understand how to calculate the intrinsic value of a business, you now have a powerful tool for finding great investment opportunities. The best way to do this, according to Dhando, is to look for distressed companies. Going back to the story of Papa Patel and his motel investment — he bought the motel in the s during a very troubled time in the economy. The country was in a deep recession and you could pick up motels at fire-sale prices.
You can also do this in the stock market. Because stock prices are so volatile and driven by news headlines, the market can be very emotional. Be greedy when others are fearful. In medieval times, a castle needed to have a moat in order to keep out its enemies. The wider and deeper the moat, the greater the protection. Thanks to free-market capitalism, competition in any industry can be brutal.
How do we know for sure if a business has a moat? You can look at the financial statements. A business with a strong moat will have a high return on capital. This is a metric that tells us how much income business is generating with the capital deployed in the business. I have a free download for you called the Stock Investing Checklist , and in it, I go over in detail how to calculate these numbers. Moats can come from having a brand name, a cost advantage, economies of scale, and so much more.
Again, I go over moats in more detail in my Stock Investing Checklist. But as a Dhando investor, when you come across a high-probability bet, you want to bet heavily. With the Patel motel example, the Patels saw an opportunity with a huge upside and very limited downside, and they jumped on it.
Because with a setup like that, you have a high probability of huge success and a very low probability of moderate failure. The Dhando framework is all about examining the odds. The formula is based on calculating the odds, and it was made infamous by Ed Thorpe, an MIT math professor who used it to make a killing playing blackjack in Las Vegas casinos.
Although investing is not the same as playing blackjack, thinking probabilistically and betting big in high-probability situations is the main takeaway of this fifth Dhando investing principle.
You might be placing yourself at risk this way. Why diversification becomes so important; can be understood with the current Corona outbreak situation. If in case, suppose you had all your bets placed in either of the above-mentioned industries, your portfolio would be doomed.
So, it is always advised to keep a good balance of diversification in your investment net. Selling a Product or Service: You may always pick selling of a product or service as another stream of income. This could be one small side business that you get to control fully on your own. You may choose to become a distributor for a third party agency and help them reach their customer base for their product or service.
This work is basically part-time and can be handled over phone calls and emails. But it can earn you really good cash in hand. Another way of creating a part-time income is to do what you love. You may want to roam around and take care of pet dogs or want to babysit or want to mow the lawns etc. But this can earn you good money over a tenure. It is how you disconnect your ability to earn from the time that you do have in a day everybody gets 24 hours in a day, no less no more!
With multiple passive incomes, you actually make money while you sleep. By definition, Franchising is an enduring relationship in which a franchisor provides a licensed privilege to the franchisee to do…. The smooth flow of finances makes for an indispensable part of running a business. It ensures that your business activities….
I believe most of the people in my surrounding know very well that investment is my first love. People have…. It was March , we were all set to end our financial year just as every year. Life was sailing….
People often think that credit cards are only used for shopping or as an emergency back-up. But they are more…. Loans come to our rescue in times of unexpected financial emergency. While sometimes, loans help us sail through tough times,…. I know, what you would be thinking right now reading the title above. Introduction The stock market is quite accessible, making it very tempting for many people to want to invest in it.
Hospitality and Real Estate are two such sectors which have large number of players in them but are still highly…. Here I am sharing few passive income ideas which might suit you as per your interest: Go Digital: This is the best time to generate a passive income online.
Read More. Dhandho is likely to never offer more than a small number of investment vehicles. We hope to never bring products to market that we believe are not world-class. We cannot understand how an investment house can be intellectually honest and have dozens of funds and offerings. Yet this is unfortunately how this industry typically functions. By providing dozens of offerings and strategies, other investment shops are able to constantly promote a new "flavor of the month.
But, as soon as the performance of that fund wanes, predictably enough, it is no longer promoted and instead another fund is pushed, the one that now has recent good performance.
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The same can be done online easily and being done by many people these days for some extra amount of money in their part-time. Few people have even made this a full-time job for them and earn in digits a month easily, all in their comfort of home. People want to pay you a good amount of money if your knowledge base is strong and an in-depth explanation is delivered in your classroom. Franchising: This is a traditional way of owning a business of a popular brand that already has a good presence in the market.
A franchise business can be a really good source of a passive income. Since you do not exactly have to build the brand from scratch or the setup as a whole. As the brand is there to support you in every step of setting up the business and extending the support in terms of marketing, software, and manpower, etc. Franchising starts at an investment as low as 5lack. You may choose the industry segment of your choice and then narrow down onto the brand which you would want to own.
Love Social Media? Manage Accounts! Why not turn this love into side business ideas? Many small businesses in spite of acknowledging the fact that social media is crucial for their business growth, are not able to devote their time to this aspect of their business.
If you have a knack of the same, you may reach out to such businesses. You may do it on a monthly or yearly contract basis and can make it a good source of income. Get Blogging: Love sharing your thoughts on a particular topic and want to get paid for it?
Your blog can make INR thousand a month for you via affiliate revenues. You do almost nothing to get this — readers read, they click and sometimes they make a purchase of the product or the services mentioned at no extra cost to them. I just want to share some financial independence literacy amongst my readers.
The money from the blog becomes the by-product of the passion for sharing the same knowledge with others. Diversification of Investments: If you are an investor like me, please diversify your investments. You might be placing yourself at risk this way. Why diversification becomes so important; can be understood with the current Corona outbreak situation. If in case, suppose you had all your bets placed in either of the above-mentioned industries, your portfolio would be doomed. So, it is always advised to keep a good balance of diversification in your investment net.
Selling a Product or Service: You may always pick selling of a product or service as another stream of income. This could be one small side business that you get to control fully on your own. You may choose to become a distributor for a third party agency and help them reach their customer base for their product or service. This work is basically part-time and can be handled over phone calls and emails. But it can earn you really good cash in hand. Necessary cookies are absolutely essential for the website to function properly.
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