Book Review: What Makes a Dhando Investor?

Mohnish Pabrai is an Indian-American businessman and investor. For a number of years, he turned heads with the performance of Pabrai Investment Funds since its inception in 1999. Pabrai has high regards for Warren Buffett and admits that his investment style is copied from Buffett and others. We're exploring the topics in his book about value investing.

Below are summary reviews of chapters 1-5

Chapter 1

Pabrai starts the book by discussing the term "dhandho" (pronounced "dhun-doe"), which is a Gujerati word meaning "endevours that create wealth" or "business". Gujerat is a coastal province in India that has served as a hotbed for trade with Asia and Africa. The Patels are a subsection of Gujeratis that are particularly entrepreunerial (they were chosen by the rulers to run the operations of the farm and collect the taxes), and their entrepreneurial ventures led to them forming a dominant part of the East African economy by the early 1970s. When Asians were thrown out of Uganda in 1972 on the basis of their race, a flurry of Patel immigrants landed in Canada, England and the United States.

The Patels now make up about 0.2% of the American population. Yet they own over half of the motels in the entire country, which comprises $40 billion in assets and $725 million in annual taxes. Pabrai attributes this to particular conditions which led the Patels to recognize and benefit from the minimal downside risk and upside potential that existed in the motel business when they immigrated to the United States.

The first Patels arrived during a recession. Motel owners were being foreclosed due to low occupancy rates. With just a few thousand dollars in hand, Patels could kill two birds with one stone by finding room and board for their families and a job at the same time by buying a motel. Since the assets are hard, banks would finance 80-90% of the purchase, so the initial investment required was low.

From here, Pabrai discusses some of the financial details that made these investments value investments: Low risk (the few thousand dollars initial investment) and high reward (with their low living expenses and hard-working attitude, Patels could make back their initial downpayment in the first four months!). This introduction to low risk / high reward sets the theme for the rest of the book.

Chapter 2

To dispel the idea that the story described in Chapter 1 was simply a matter of fortunate timing and luck, Pabrai describes another successful entrepreneurial venture where the risks were low but the potential upside was high. The story is that of Manilal Patel, a man who immigrated as an accountant, but could not land a job due to his broken English.

For several years Manilal worked for minimum wage, slowly building wealth while biding his time and searching for a business to own and run. For twenty years he worked nearly around the clock and began to invest in residential real-estate. After September 11th, however, he would get the break he was waiting for. Travel was down, and the hotel market was suffering once again. Manilal was able to take advantage by finding some partners and putting much of his own capital towards the purchase of a Best Western hotel. The hotel required a downpayment of $1.4 million, which Manilal borrowed against his house to help fund.

Pabrai goes into further detail about various scenarios of the hotels return's. But the lessons Pabrai is attempting to illustrate are clear:

1) When a terrific investment opportunity is available, a bigger investment should be made. As Pabrai calls it: "Few bets, big bets, infrequent bets".

2) Participate in investment opportunities that have minimal downside risk but high upside potential: "Heads, I win; Tails, I don't lose much."

Chapter 3

In the first two chapters, Pabrai described how hard-working immigrants with few expenses managed to go from poverty to millions over the course of their lifetimes. Is this the only way to make money with little risk? Absolutely not.

In this chapter, Pabrai tells the story of Virgin, and how its founder Richard Branson is also a Dhando investor. Branson has managed to take several business ideas that have come to him over the years, invest in them with minimal risk, and generate high rewards. How has he done this? Pabrai gives details about how Branson:

• Started Virgin Airlines with a one-year low-cost lease on a single airplane

• Developed Virgin Pulse with guaranteed distribution and outsourced manufacturing

• Launched Virgin Mobile with no cell-phone network

• Offered Virgin Mortgage without a banking infrastructure

In all of the cases Pabrai describes, the overriding theme continues to be: "Heads, I win; tails, I don't lose much". Branson's businesses don't take on the risk because they don't require investment in infrastructure. Instead, they leverage existing infrastructure or outsource to other companies that have to take on the risk. What Branson does get, however, is the upside. With that risk-reward profile, Branson is crowned by Pabrai as a Dhandho investor.

Chapter 4

In 2005, Forbes listed Lakshmi Mittal as the third richest man in the world. Unlike many others on the rich list, Mittal operated in an industry with extremely poor returns on capital - steel mills. As an owner of a steel mill, you have no control over the selling price of your products, and in order to have the capacity to keep producing your end product, you need a constant supply of capital. As a result, the steel industry has been one of the worst places to invest over the last few decades, with bankruptcies abound around every corner.

Mittal was able to transform his steel mills into efficient steel-producing machines. But if he had grown organically, he likely would never have managed to get his net worth to $20 billion. Instead, he grew by acquiring steel mills that were going under. In some cases, he was acquiring for 10 cents what other investors had built for $1. Once he applied his operational efficiencies to the plants, he had restored the value of the assets to $1 or more, thus generating incredible returns on investment. Once again, Pabrai's "Dhandho" theme echoes through: the downside is minimal, and the upside is tremendous.

Pabrai also takes us the reader through his own experience applying "Dhandho". When he started his business, he had $30K in cash, and $70K in credit card maximums. If his investment went south, he would have to declare bankruptcy and will have lost $30K and would simply have returned to his old job. In other words, his downside risk was minimal. But his upside was not. Within a few years, he had sold his business for several million dollars. This represents another example of Pabrai's "Heads, I win; Tails, I don't lose much" philosophy.

Chapter 5

While the low-risk / high-reward businesses described in the first four chapters were varied in type, they did share some commonalities. These commonalities form the basis for the rest of the book, where Pabrai discusses these features in detail:

1. Buy an existing business: each of the businesses described in the first four chapters had defined business models; nothing new was being invented.

2. Buy businesses in simple industries with a low rate of change: all of the businesses described were necessary and were not about to be replaced.

3. Buy distressed businesses in distressed industries: the very best time to buy a business is when it is hated and unloved.

4. Buy businesses with a durable competitive advantage: this advantage can come from being low-cost to having a brand to having captive customers.

5. Bet heavily when the odds are in your favour: in the businesses described, sometimes the investor did not make moves for several years, but when the opportunity was clear (odds in favour, with excellent returns), he invested much.

6. Focus on arbitrage: in all cases, the investors saw a discrepancy between price and value that they exploited.

7. Buy businesses at big discounts to their intrinsic values: the odds of a permanent loss are low when this approach is followed.

8. Look for low-risk, high-uncertainty businesses: the uncertainty leads to severely depressed prices.

9. It's better to be a copycat than an innovator: "innovation is a crapshoot, but scaling carries far lower risk."

Comments

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Indian businesspeople are some of the best, if not the best. As the gov't has lifted restrictions there, businesses have flourished.

Renowned for their acumen, the Dhando are a special subset, but they are not different in any significant way from any other Indian, Asian, or anyone in the world. Learn business. See how it works, from marketing, to legal, to management and beyond. Then take a Dhando risk. You will win.

Oct 04 08:40 PM