Book review: “The Dhando Investor” – Monish Pabrai

For me, Monish Pabrai is mostly known as the guy who bid a couple of hundred thousand bucks in order to have lunch with Warren Buffet. But actually he has written a book as well.

The book claims as subtitle: “The Low-Risk Value Method to High Returns”.

The book shows a couple of “real world” examples, where people made a lot of money with somehow limited investments for instance a group of Indian refugees which went into Motels in the 70ties or Richard Branson with Virgin and Lakshmi Mittal.

He then lays out his “Dhando framework”:

1. Focus on buying existing businesses
2. Buy simple businesses with an ultra-slow rate of change
3. Buy distressed businesses in distressed industries
4. Buy businesses with a durable competitive advantage
5. Bet heavily when th odds are overwhelmingly in your favour
6. Focus on arbitrage
7. Buy businesses at big discounts to their underlying intrinsic value
8. Look for low-risk high uncertainty businesses
9. It’s better to be a copycat than an innovator

The book itself is very well written and quite accessible even for investment beginners. That is the big strength of the book. However I have also some “quibbles” with the book:

– In the “arbitrage” section, i think how confuses arbitrage and competitive advantage. The low costs of GEICO, WB insurance company is clearly the simplest form of competitive advantage (cost) and not any kind of arbitrage

– I personally find the combination of large bets and distressed situations quite dangerous. If you read the book, you could come to the conclusion that it is a good strategy to invest a large portion of your portfolio into a few, highly indebted companies. I would say this is in % of the cases a very good way to lose a lot of money, especially if you do that before a general recession.

-some of his own investments mentioned in the book rather look like lucky timing (buying in 2002) than anything else

Summary:

Overall, I think it is a well written book, which nicely summarizes several aspects of “Value Investing”. In my opinion, it is clearly not any kind of new method, but that doesn’t matter and you will not be producing superior invetsment returns after reading it. But it is a good book to wet ones appetite for value investing and hopefully read other books (Bruce Greenwald, Seth Klarman).

Although the book is clearly written for “the average investor”, one should however be careful not to misinterpret the different approaches, especially position size and “distressed” investments.

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