The Dhandho Investor

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

Poor Charlie’s Almanack

Book Cover ,‘Poor Charlie’s Almanack – The Wit and Wisdom of Charles T. Munger’ is a compilation of essays, memoirs, interviews, and speeches regarding Warren Buffett’s closest friend and business partner, Charles T. (Charlie) Munger , edited by Peter D.Kaufman.

Charlie Munger is an admirer of Benjamin Franklin,and the book’s title is a tribute to Franklin’s ‘Poor Richard’s Almanack.’

This is a big’ heavy coffee-table book with well over 500 pages.It’s pretty heavy reading and best left in the library.Reading the book cover to cover is only for serious Munger fans.

Thumbing through the book I figured that the only solid take-aways I could get without knocking myself out by tackling this formidable book were (1)Mungerisms,(2)The concepts to be mastered to apply the Multiple Mental Models to think better and (3)A checklist of investing principles. Read more of this post

An Investing Principles Checklist

This is an investing principles checklist from ‘Poor Charlie’s Almanack’.I think it bears reading at frequent intervals just to ensure we aren’t doing something incredibly stupid or failing to do something basic that could better our investment records.

Risk – All investment evaluations should begin by measuring risk, especially reputational
  • Incorporate an appropriate margin of safety
  • Avoid dealing with people of questionable character
  • Insist upon proper compensation for risk assumed
  • Always beware of inflation and interest rate exposures
  • Avoid big mistakes; shun permanent capital loss

Independence – “Only in fairy tales are emperors told they are naked”

  • Objectivity and rationality require independence of thought
  • Remember that just because other people agree or disagree with you doesn’t make you right or wrong – the only thing that matters is the correctness of your analysis and judgment
  • Mimicking the herd invites regression to the mean (merely average performance)

Preparation – “The only way to win is to work, work, work, work, and hope to have a few insights”

  • Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day
  • More important than the will to win is the will to prepare
  • Develop fluency in mental models from the major academic disciplines
  • If you want to get smart, the question you have to keep asking is “why, why, why?” Read more of this post

The Difference Between Stock Market Investors and Speculators

The following is an excerpt from Seth Klarman’s ‘Margin of Safety.’I got around to reading this book based on the recommendations of one of the readers of this blog.Thank you Andy!I think the following is a nice way of making a distinction between stock market investment and speculation.BTW the book is pretty nice and I will blog more about it as and when I come across more interesting stuff.




To investors stocks represent fractional ownership of underlying businesses and bonds are loans to those businesses.Investors make buy and sell decisions on the basis of the current prices of securities compared with the perceived values of those securities. They transact when they think they know something that others don’t know, don’t care about, or prefer to ignore. They buy securities that appear to offer attractive return for the risk incurred and sell when the return no longer justifies the risk.Investors believe that over the long run security prices tend to reflect fundamental developments involving the underlying businesses. Investors in a stock thus expect to profit in at least one of three possible ways: from free cash flow generated by the underlying business, which eventually will be reflected in a higher share price or distributed as dividends; from an increase in the multiple that investors are willing to pay for the underlying business as reflected in a higher share price; or by a narrowing of the gap between share price and underlying business value.Speculators, by contrast, buy and sell securities based on whether they believe those securities will next rise or fall inprice. Their judgment regarding future price movements is based, not on fundamentals, but on a prediction of the behavior of others. They regard securities as pieces of paper to be swapped back and forth and are generally ignorant of or indifferentto investment fundamentals. They buy securities because they “act” well and sell when they don’t. Indeed, even if it were certain that the world would end tomorrow, it is likely that some speculators would continue to trade securities based on what they thought the market would do today.Speculators are obsessed with predicting-guessing-the direction of stock prices. Every morning on cable television,every afternoon on the stock market report, every weekend in Barron’s,every week in dozens of market newsletters, andwhenever businesspeople get together, there is rampant conjecture on where the market is heading. Many speculators attempt to predict the market direction by using technical analysis-past stock price fluctuations-as a guide. Technical analysis is based on the presumption that past share price meanderings,rather than underlying business value, hold the key to future stock prices. In reality, no one knows what the market will do;trying to predict it is a waste of time, and investing based upon that prediction is a speculative undertaking.

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