Paper Assets | wealthymatters

Advice on Buying a Business

March 6, 2011 Leave a comment

This is a repetition of material from the last post.I just think the matter is important enough to merit a post by itself.This is Mohnish Pabrai’s list of to-dos when buying a business.By paying attention to the following 9 principles of the Dhandho Framework you ensure that you bear the least risk and have the highest chance of a big pay-off.Of course, buying shares is buying parts of a business so you can apply the same criteria to come out ahead.

Buy an existing business: you get a defined business model and have to invent nothing new.
Buy businesses in simple industries with a low rate of change: buy businesses that are necessary and not about to be replaced any time soon.
Buy distressed businesses in distressed industries: the very best time to buy a business is when it is hated and unloved.
Buy businesses with a durable competitive advantage: this advantage can come from being low-cost to having a brand to having captive customers.
Bet heavily when the odds are in your favour: if you must, wait for several years till the right opportunity comes by, then invest big-time.
Focus on arbitrage: exploit any discrepancy between price and value.
Buy businesses at big discounts to their intrinsic values: the odds of a permanent loss are low when this approach is followed.
Look for low-risk, high-uncertainty businesses: the uncertainty leads to severely depressed prices.
It’s better to be a copycat than an innovator: “innovation is a crapshoot, but scaling carries far lower risk.”

Filed under Entrepreneurship, Paper Assets, Tool Kit Tagged with 9 Principles of the Dhandho Framework, arbitrage, bet heavily, business with low rate of change, buy an existing business, buying a business, copycat, distressed business, distressed industry, durable competitive advantage, Entrepreneurship, innovator, low risk high uncertainity, Mohnish Pabrai, postaday2011, RandomBlog2011

The Dhandho Investor

March 6, 2011 4 Comments

This book is pretty small – just a little over 200 pages.And I love it.I am naturally a bargain hunter and love shopping in sales.I also love getting high quality goods at bargain-basement prices.So It’s small wonder that I am attracted to value investing.The danger of shopping in sales is that a person picks up things they don’t have any use for or items that are not a perfect fit just because they are cheap.Then there is a danger of buying poor quality stuff just because it seems to cost so little.The same applies to buying stocks cheap.Sometimes the whole market is beaten down and all stocks seem cheap, but if I buy stocks of companies I would not normally buy because of their poor returns to investors,just because they are cheap,I am left with the problem of selling them when the market and the stock recovers.This is a problem for me personally as I have a tendency to get married to my stocks.At other times a stock sells for low P/E multiples simply because there is something fundamentally wrong with the company. Stocking up on the shares and hoping for a turn-around is pretty foolish.But I am an optimistic type and I need to force myself to turn away from such situations.Over a period of time I have found ways to control my habits.When the markets are down,I first establish a budget and then try to make a list of likely stocks and arrange them in order of attractiveness depending on Buffett-style criteria and tell myself that I’m to invest over 80% of the budget on only the top 5 of my list.I find this stops me from stocking up on not so great businesses that I might find hard to sell later.Then I have accepted the fact that I am a speculator at heart.I no longer try to fight the urge but try to use the Dhandho Principles that come pretty naturally to me to gain out of my speculative tendencies.This is a book I recommend for all investors like me who like value investing but can’t overcome the urge to speculate.

Here is a round up chapter-wise of what is found in the book:-

Chapter 1

Pabrai starts the book by discussing the term “dhandho“which is a Gujarati word meaning “business”. Gujarat is a western coastal state in India that has served as a hotbed for trade with Asia and Africa. The Patels are a community of particularly entrepreunerial Gujaratis whose 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. Read more of this post

Filed under Entrepreneurship, Paper Assets, Theory Tagged with Arie de Geus, B, bargain hunter, Best Financial Books, Best Western hotel, book review, Buffett, Buffett Quotes, business, buy an existing business, cash flow, competitive advantage, Dhondho Inestor, distressed businesses, distressed industries, Entrepreneurship, foreclosure, Fortune 500, Fortune Formula, Greenblatt, Gujarat, Gujarati, immigrants, intrinsic value, Investment Book, Kelly Formula, Lakshmi Mittal, low risk high uncertainity, low risk high value, Monhish Pabrai, occupancy rate, P/B, P/E, Patel, postaday2011, Potels, RandomBlog2011, Richard Branson, share investing, simple and predictable companies, speculation, stock investing, The Dhandho Investor:The Low Risk Value Method to High Returns, The Little Book That Beats The Market, turn around, Uganda, V, valuation, value investing, Virgin Airlines, Virgin Mobile, Virgin Mortgage, Virgin Pulse, Warren Buffett, William Poundstone

Mohnish Pabrai

March 6, 2011 1 Comment

Mohnish Pabrai is an Indian-American businessman and deep value investor.He is the managing partner of the Pabrai Investment Funds, which he founded in 1999.He is also a member of the Young President’s Organization (YPO) and a charter member of The Indus Entrepreneurs (TIE).

Monhnish Pabrai first trained as a computer engineer. He then spent nearly two decades in the tech field.In 1990, he quit his job working as an engineer for Tellabs in Chicago and abandoned his master’s thesis at the Illinois Institute of Technology to launch TransTech, an IT consulting and systems integration company, which he funded with $30,000 from his retirement account and $70,000 from credit cards.His father encouraged him in the endeavour,saying that it was the right thing to do as staying at Tellabs and following the staid boring corporate path was high risk. Starting a business on the other hand was low risk, could give high returns and high adventure. As Monaish was single at the time there were few complications and in the worst case, he would lose everything ,which wasn’t much anyway,and could declare personal bankruptcy and start over. By 1999, Transtech, which had grown to 200 employees and $30 million in revenues, held no thrill. So he sold it. And during the tech boom,he started another company, internet incubator Digital Disrupters, which had a very painful and swift demise due the tightening of capital markets .In 2000, he sold TransTech to Kurt Salmon Associates.During late 1999, with nine other investors contributing $100,000 each,Mohnish started Pabrai Funds with $1,000,000 in assets. Pabrai Funds was modelled on the original “Buffett Partnership.” Read more of this post

Filed under Entrepreneurship, Paper Assets, Theory Tagged with Amar Bhide, Benjamin Graham, Blaise Pascal, bridge, Buffett Partnerships, businessman, capital, Charles Munger, Charlie Munger, Confusing Activity with Productivity, Digital Disrupters, double hulled oil tankers, entrepreneur, Greek Shippers, Gujarati, Guy Spier Aquamarine Capital Management, Harina Kapoor, Kurt Salmon Associates, Latticework Of Mental Models, leverage, Losing My Virginity, Lunch with Buffett, Michael Dell, Mohnish Pabrai, Mosaic: Perspectives on Investing, Motley Fool, Nike Just Do It, Norweigian oli tanker firm Frontline, Oracle of Omaha, Pabrai Investment Funds, Patels, postaday2011, RandomBlog2011, reading, real estate, Richard Branson, Sam Walton, scrap, Single Hulled Tankers, Smith & Wollensky, special situations, start up capital, Telllabs Chicago, The Dhandho Investor:The Low Risk Value Method to High Returns, The Indus Entrepreneurs TIE, The Origin and Evolution of New Businesses, Transtech IT consulting Systems Integration, value investor, Warren Buffett, Young President's Organization

Confusing Uncertainity With Risk

March 4, 2011 Leave a comment

Here is an extract from the article ‘ Investors will miss out if they confuse uncertainity with risk ‘ by Whitney Tilson published in the Financial Times on 16 Feb 2008.I think confusing uncertainity with risk is precisely what happened pre-budget in India this year. And this confusion is something that happens to a greater or lesser extent every year before the budget.The same thing happens before the final decision is taken on any government policy. So if a stock investor remembers that there is a difference between uncertainity and risk he/she can sometimes buy shares cheap.Risk means the chance of a loss of capital. Uncertainty is the range of different outcomes. So a stock may have high uncertainty but may not be risky, if no one knows what will happen but the worst case scenario would not results in a huge loss.

“Dealing with uncertainty is always a key challenge for investors. But dealing with uncertainty doesn’t mean avoiding it – on the contrary, it is often fuzziness about a company’s future that creates the type of opportunity bargain-hunting investors cherish.Wall Street in the main hates uncertainty, which manifests itself in depressed share prices of companies whose prospects lack “visibility.” But where the market can err is in confusing uncertainty with risk. Just because a company’s future is highly uncertain doesn’t mean an investment in it is risky. In fact, some of the best potential investments are highly uncertain, but have little risk of permanent capital loss. As hedge-fund manager Mohnish Pabrai describes it in his book, The Dhandho Investor: “Heads, I win; tails, I don’t lose much.” Read more of this post

Filed under Paper Assets, Theory Tagged with bankrupt, bargain hunting, buying opportunity, debt fuelled consolidation, debt load, debt problems, doubling share price, Financual Times, free cash flow, Funeral Home Operator Stewart Enterprises, government policy, least likely to fail, Monaish Pabrai, permanent loss of capital, pre-budget, probability, Risk, share investing, stock investing, stock investor, stock share, The Dhandho Investor, Uncertainity, Whitney Tilson

6 Investment Rules

March 2, 2011 Leave a comment

The secret to doing well in stocks over the long term is to avoid making big mistakes rather than being spectacularly right a few times in one’s career.After all it just takes just one big enough mistake to wipe away all the gains of the previous years.The following checklist is to help avoid making major mistakes.

1. Avoid following the crowd.
Avoid the hottest stocks in the hottest sectors, which are invariably priced high.It’s far safer and more profitable to invest in stocks of companies that are either well-known but currently out of favour or not tracked at all by analysts often simply because they are too small to be of interest to institutional investors.

2. Look for consistently positive cash flow and beware of debt.
Share holders make money through dividends.The company first needs to throw off cash through its operations to be in a position to reward shareholders consistently.Debt reduces the surplus available for share holders.Excessive debt might kill a company in bad times.

3. Avoid serial acquirers and if necessary buy stocks of good companies after big acquisitions.
Making many small acquisitions or one big one are both fraught with peril, yet some managements insist on engaging in such behaviour regularly. They often fritter away the resources of their companies and shareholders in this way.If you must buy a company that has just made an acquisition buy after the deal , when the share price has dropped , not in the frenzy before the deal. Read more of this post