“The Dhandho investor” – A review

We’ve heard of fusion music, we’ve heard of fusion cuisine, so why not a fusion book?

Colour me naive, but when I picked up ‘The Dhandho Investor’ – a book with an Indian author and an Indian name, I thought it would be about Indian markets and for Indian investors. It was not. Although the author is Indian, and there are many ‘Indian’ anecdotes in the book, it is aimed at an American audience.

But that should not stop you from grabbing it and reading it. It’s a delightful book – expertly written with ideas that you can use in any free market economy.

The book itself is not new (nor updated recently). It was published in 2007. But the principles it espouses are quite timeless, and as the author’s active blog suggests, still being practiced assiduously. 

A brief summary

The book is about value investing. The author, Mohnish Pabrai, a celebrated fund manager, is a disciple of Warren Buffet (he famously once bid $650,000 in an auction to have lunch with Mr Buffett himself) and, in this book, he details the value investing principles that he advocates and adheres to. Mohnish calls his ‘brand’ of value investing ‘Dhandho’ investing (Dhandho is a Gujarati word that means ‘endeavours that create wealth’)

The book starts off brilliantly. The first 4 chapters are illustrations of dhandho investing. The first chapter is about the success of Patels in the motel business in the US. How they came, saw, and conquered, from coast to coast, the business of inexpensive night stays for travellers. It gives a historic and geographic narrative (from Gujarat to Africa to US through 60s and 70s) of that incredible wealth building journey, from a socio-economic perspective. The second chapter is another motel success story, the third chapter is the story of Laxmi Mittal and his steel business, and the fourth chapter is about Richard Branson Virgin Atlantic. Yes, the last one kinda sticks out as an oddman, but I am willing to give the author a pass for making it interesting 🙂

After these stories, the book goes on to find the commonality between these successes – how identifying opportunities where if you win you win big, and if you lose, you don’t lose that much is the key to their successes. 

This, in essence, is the Dhandho philosophy – look for and study opportunities where the payoff for success is significantly higher (along with its probability) and the loss potential (both probability and magnitude) is significantly low. And when you find these opportunities, you bet big and wait to realize the value.

As you can probably see, this approach is but the crux of value investing as prescribed by Buffett and co.

Although the book starts off with entrepreneurial applications of the Dhandho philosophy, the rest of the book takes an investment angle to it. And talks about what principles to use to identify Dhandho opportunities in the stock market.

These principles, which animate the rest of the book, are things like investing in simple, existing businesses that have a wide moat and are available at a discount to its intrinsic value. And about how such opportunities are rare and when you find it, you should bet big, but still have a margin of safety. All these principles are first enumerated, and then explained in individual chapters with copious examples. Among these chapters, there is not a single dry pedantic essay – everyone of them is filled with anecdotes and examples from the author’s experiences in the market. Each one of them makes for a swift, interesting read.

The book winds up with two parables from Mahabharata – one about Abhimanyu to illustrate the points about how to get out of an investment, and another about Arjuna about how to stay focused. Finally, the author quotes a wonderful Khalil Gibran passage to emphasize the importance of giving and sharing your riches (once you have them, that is 🙂 )

Dhandho investor – My thoughts

I found the book very interesting and I learned quite a bit. Yes, I wish there was an updated edition since the book’s first publication 15 years ago, and yes, I wish this book had illustrations from the Indian market (or had a separate edition that did). Nevertheless, there is a lot of information and wisdom packed into these 200 pages that I am sure will have me reaching back into its chapters in the future.

After reading the book, I got thinking a bit about my own investing journey over the years. I have invested only a small percentage of my overall corpus in direct stocks, but if I look at those stocks – the way I picked them, the way I held them, and sold them – I can identify some serious flaws in retrospect.

The most important investment principles espoused in this book are to invest in simple businesses that you understand, and ones that are trying to emulate success and not innovate. Such businesses have higher probability of success than complex businesses or front-runners, is the thesis.

In my own investments, I can see that I have misapplied one of these principles and scoffed at the other. As a person with technical background, I have made most of my investments in technology companies – thinking that I understand them. But little did I realize that understanding the technology of a business is NOT the same as understanding the business of technology. I have burnt my fingers many times on such bets.

And I have always thought innovation is the key to success in business. And while that may be true in an entrepreneurial venture that one launches into, it need not be true when it comes to investing or taking market bets. Such bets are best left to venture capitalists and PE companies, and not to John Rando investors like myself.

This book did not point these mistakes to me, but the book was written with such conviction that it got me thinking.

Apart from these, there are several other learnings – like the Kelly formula and how to use it to allocate capital, the difference between risk and uncertainty, identifying the time to sell (and how much) etc. Not all of it was new to me and I am sure it won’t be for you either, but there is enough there to educate every reader in some way.

On a final note, let me draw a brief comparison between the approach to wealth prescribed in this book and the one I reviewed last week – The Millionaire Fastlane. Both books celebrate entrepreneurship and point to a path to riches. 

However, the approach followed by the Dhandho entrepreneurs is not quite the ‘fastlane’. If you remember De Marco’s guidelines for a ‘fastlane’ startup, two important ones are these –  a company needs to be able to run without utilizing your personal time, and be able to serve ‘millions’. 

The Dhandho investor does not care about these edicts. The motel businesses squeezed out the personal time of its owners and it served thousands, at best, in a year. But these dhandho investors were not out to make a fast buck and retire in a few years. They were in for the long haul, did not care about getting their hands dirty, and wanted to create a network of successful entrepreneurs – not just success for themselves alone. Following this path, they built an immense amount of wealth, patiently. 

And, value investing, I reckon, is similar. The keys to building wealth in either case – investing or entrepreneurship are not too different – doing a lot of legwork to identify the right opportunities, investing big (either in the form of time or money), staying patient, and realizing great value when the right time comes by, as it inevitably does.