Book Review: 'The Dhandho Investor' by Mohnish Pabrai

AUTHOR: Mohnish Pabrai
RATING: 8.5 of 10
REVIEW by Davy Bui 06/15/2007

Select Highlights

• Very good look at risk as permanent capital loss in the context of time opportunity cost, which I haven’t seen in other books
• Organic use of “latticework” models to view investing from different perspectives, including even mythology as a way to illustrate investing concepts
• Nice discussion of exit strategies
• Touches on a nice range of topics from distressed companies to Kelly’s formula for assessing odds.
• Good overview of research sources for prospective investments

Weak Points

• Over-reliance on Buffett quotes (I love Buffett too, but I wanted to read what Mohnish Pabrai had to say!)
• Like Greenblatt’s Little Book that Beats the Market, it skips over the technicals a little too much
• A frugal cheapskate like me couldn’t square the $30 price tag for 180 pages (I know I’m paying for knowledge, not pages but something inside just wouldn’t let it go)

I read this book last weekend. The reason I mention this is that, in the last 10 months, I’ve read at least 15 books on value investing, not to mention numerous Warren Buffett books. The concept of value investing is fairly simple and as Buffett said, either it grabs you immediately and makes perfect sense or it’s not for you. So when I open yet another book on value investing, I’m hoping for new insights that go beyond the familiar Graham/Dodd/Buffett tenets. After you’ve read 2 or 3 value investing books, things get repetitive awfully quick. So my 8.5 rating for The Dhandho Investor belies my delight at several semi-new concepts that Pabrai introduced to me as well as a few other concepts that he presented in a new light.

Using a familiar, conversational tone throughout, Pabrai lays out the foundation of his investment style, which is heavily influenced by Warren Buffett. He calls it “Dhandho Investing.” The way I see it, the concept behind dhandho is quite simple: it’s the exact same attitude people have when they play the lottery. I pay $1 and if I win, I’m a millionaire, woohoo! If I lose, I’m out a buck — no big deal. Well, dhandho is exactly like that except the odds of actually winning are more like 75% or 90% as opposed to 1 in a billion. And then he goes through several methods and sources of finding dhandho investment opportunities.

I won’t rehash the whole book. Almost all of the concepts in this book can be found in other sources, probably even from his last book, I would guess (it’s out of print and I haven’t found a copy). To me, the strong point of this book is that it managed to trigger the “a-ha” switch in my brain as it relates to several concepts. For me, there’s a difference between “knowing” something and truly internalizing that knowledge. I expect Pabrai’s book will help people “get it” and internalize basic concepts of value investing. I know that Pabrai’s vivid analogy of “Abhimanyu’s Dilemma” as it relates to exiting a position helped me realize that this is an area that I need to focus on more than I currently do.

Using Kelly’s formula for risk assessment is a concept that I’ve seen before but doesn’t resonate for me. If I recall correctly, the author kinda weasels out of this by simply allocating 10% of capital into each position. But the concept of risk assessment and weighing the odds is something that I am still working on. Nevertheless, I’m glad that Pabrai brings up the subject of portfolio allocation (or bankroll management, the poker player in me wants to say). From a poker player standpoint, putting 10% of your bankroll on one position is scary so the subject of capital allocation is important. He also emphasizes a point that I’ve tried to pound on this site which is one of the biggest risks you encounter is the loss of time and compounding returns. For most people, this is the greatest wealth-building tool and while it’s hard to make up lost capital, it is very hard to make up lost years.

Summing up, Pabrai has managed a rare accomplishment — a helpful tome on investing that manages to entertain as well as any novel. This is no small feat — the “bible” of value investing, Graham’s Intelligent Investor, reliably puts me to sleep (it took me 2 months to finish that book, 2 hours to finish Pabrai’s). In this vein, Pabrai rivals Joel Greenblatt’s ability to infuse knowledge, humor, simplicity and insight on a potentially droll subject. Dare I say it, he might even approach his idol, Warren Buffett, in terms of delivery of investing wisdom.

Comments

[Georealist]

You must be a great poker player?! Since when is putting 10% of ones position on a particular hand scary! Doesn't that depend on the hand..the opponent..where you are in the sequence of hand? But why complicate the issue by actually examining it!
As for value investing...it certainly requires more than looking atselect fundamental date and straddling a middle position where one claims to hold something, but constantly finds the most negative spin on its position.
It would help your "analysis" a great deal if you read something about moats..and secular trends..and understood far more about critical resources and needs and how they simply overwhelm the trivia often seeping thru your efforts....

[YYZ]

I just finished reading this book as well. Davy's comparision with the lottery is very interesting. I also did not appreciate Pabrai's antipathy to large cap companies which he says are closer to fully valued. Buffet and Munger seem to find values in large caps consistently.

The Abhimanyu concept was useful. He advises to exit a stock after about 3 years max. --- that is discipline I need to practice as I tend to hold on for the long term....in many cases too long.