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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

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The Perfect Business

March 1, 2011 3 Comments

The best and easiest way to make money either as a businessperson or an investor is to get hold of an as near to perfect business as possible.The best businesses have the following features:

High profitability. If the business provides customers a product or service they need or want very much, and only this business can provide it, and there are few substitutes available then this firm can charge a premium price far above the costs it incurs.
High returns on capital. A business with high margins ceases to be very attractive if it is very capital intensive and requires massive amounts of capital to launch and/or remain in business. The greatest businesses require little or no money to start, can grow without major additions of capital, and do not require much maintenance cap ex.
An enormous moat. To ensure high margins and return on capital in the future it’s critical for a business to have major competitive advantages that are unlikely to dissipate over time. The key here is lack of change .Rapid change as in the hi- tech sector,benefits consumers but is very bad for investors. To quote Warren Buffett, “We see change as the enemy of investments… so we look for absence of change. We don’t like to lose money. Capitalism is pretty brutal. We look for mundane products that everyone needs…. I guarantee that Coke, Wrigley’s , and Gillette will dominate. The Internet won’t change what brands people like.”
Profitable reinvestment opportunities. The greatest businesses can reinvest their robust free cash flows back into the business at equally high rates of return on capital. Consider this: Warren Buffett has often lamented the fact that See’s Candies has never been able to expand much beyond its historical West Coast markets. It’s a fabulous company and was one of his best acquisitions ever, but the inability to reinvest its free cash flows back into growing its operations makes it an inferior business to, say, Wrigley, which has been able to grow globally over the years. Read more of this post