Patel motel Dhandho
Gujarati patels thrown out of Uganda in 1972 by Idi Amin- 'Africa for Africans', some reached America with very little money in their hands, bought small (loss making) motels and ran it themselves, the motel not only gave them a place to stay it also gave them a business to run, with their own expenses being very low they could easily turnaround the business. The patels mastered this business and today the motel industry is dominated by patels in US.
Heads, I win; tails, I don’t lose much!
Manilal Dhandho
Came to US when his brother sponsored him in 1991. Though an accountant - he started working in a gas station, then became an accountant and did two jobs till 9/11 happened (motel industry crashed), after which he bought a motel. “Few Bets, Big Bets, Infrequent Bets.”
Heads, I win; tails, I don’t lose much!
Virgin Dhandho
Richard Branson who was running a music company started a Airline company by leveraging. All you need to do is replace capital with creative thinking and solutions.The Virgin Group today is a privately held group of 200+ businesses with about $7 billion in annual revenue. It generates about $600 to $700 million a year in free cash flow. The common ingredient in virtually all 200+ businesses is that there was very little money invested in any of them at startup.Virgin Pulse into Target stores, Virgin Mobile - Virgin’s cell phone service, Virgin One Account - RBS Bank account. Branson is an ultra low-risk, ultra high-return VC.
Heads, I win; tails I don’t lose much!
Mittal Dhandho
Mittal started in 1976 with a single, small, nondescript steel mill in Indonesia. Using Marwari logic of - invested capital to be returned in the form of dividends in no more than three years - he has turned around sick mills into profitable ones.They expect that, after having gotten their money back, their principal investment continues to be worth at least what they invested in it. They expect these to be ultra low-risk bets.
Transtech Dhando
Pabrai started Transtech with 30K from his 401k and 70k from Credit card in 1990 while still working at Tellabs. When revenues hit 200K he quit his job and invested his full time in Transtech. In 2000 the entire business was sold.
Heads, I win; tails I don’t lose much
The Dhandho Framework
1. FOCUS ON BUYING AN EXISTING BUSINESS.
Having an ownership stake in a few businesses is the best path to building wealth. And with no heavy lifting required, bargain buying opportunities, ultra-low capital requirements, ultra-large selection, and ultra-low frictional costs, buying stakes in a few publicly traded existing businesses is the no-brainer Dhandho way to go.
2. BUY SIMPLE BUSINESSES IN INDUSTRIES WITH AN ULTRA-SLOW RATE OF CHANGE.
We see change as the enemy of investments . . . so we look for the absence of change. We don’t like to lose money. Capitalism is pretty brutal. We look for mundane products that everyone needs.—Warren Buffett
Look at intrinsic value of a busineess. Look at the free cash flow the business generates and estimate it for the next 10 years. Look at this figure w.r.t to todays value of that money and sum it up. That is the value of the business. Assuming no hiccups in its execution, no change in consumer behavior, and the ability to grow revenues and cash flows pretty dramatically over the years.
Five ascending levels of intelligence: “Smart, Intelligent, Brilliant, Genius, Simple.”
3. BUY DISTRESSED BUSINESSES IN DISTRESSED INDUSTRIES.
Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results —Warren Buffett
The entrance strategy is actually more important than the exit strategy —Eddie Lampert
Be fearful when others are greedy. Be greedy when others are fearful —Warren Buffett
Markets aren’t fully efficient because humans control its auction-driven pricing mechanism. Humans are subject to vacillating between extreme fear and extreme greed.Buying Motel and sick steel factorires are all part of this strategies.
4. BUY BUSINESSES WITH A DURABLE COMPETITIVE ADVANTAGE—THE MOAT.
I don’t want an easy business for competitors. I want a business with a moat around it. I want a very valuable castle in the middle and then I want the duke who is in charge of that castle to be very honest and hardworking and able. Then I want a moat around that castle. The moat can be various things: The moat around our auto insurance business, GEICO, is low cost.—Warren Buffett
Of the fifty most important stocks on the NYSE in 1911, today only one, General Electric, remains in business. . . . That’s how powerful the forces of competitive destruction are. Over the very long term, history shows that the chances of any business surviving in a manner agreeable to a company’s owners are slim at best—Charlie Munger
5. BET HEAVILY WHEN THE ODDS ARE OVERWHELMINGLY IN YOUR FAVOR.
To us, investing is the equivalent of going out and betting against the pari-mutuel system. We look for the horse with one chance in two of winning which pays you three to one. You’re looking for a mis-priced gamble. That’s what investing is. And you have to know enough to know whether the gamble is mis-priced. That’s value investing —Charlie Munger
The wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don’t. It’s just that simple—Charlie Munger
We might invest up to 40% of our net worth in a single security under conditions coupling an extremely high probability that our facts and reasoning are correct with a very low probability that anything could change the underlying value of the investment. We are obviously only going to go to 40% in very rare situations— this rarity, of course, is what makes it necessary that we concentrate so heavily, when we see such an opportunity. We probably have had only five or six situations in the nine-year history of the partnerships where we have exceeded 25%. Any such situations are going to have to promise very significant superior performance.. . . They are also going to have to possess such superior qualitative and/or quantitative factors that the chance of serious permanent loss is minimal. . . . In selecting the limit to which I will go in any one investment, I attempt to reduce to a tiny figure the probability that the single investment can produce a result for our portfolio that would be more than 10 percentage points poorer than the Dow. —Warren Buffett
6. FOCUS ON ARBITRAGE.
1. TRADITIONAL COMMODITY ARBITRAGE
2. CORRELATED STOCK ARBITRAGE
3. MERGER ARBITRAGE
4. DHANDHO ARBITRAGE
The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage —Warren Buffett
7. BUY BUSINESSES AT BIG DISCOUNTS TO THEIR UNDERLYING INTRINSIC VALUE.
. . . the function of the margin of safety is, in essence, that of rendering unnecessary an accurate estimate of the future —Benjamin Graham
The Intelligent Investor is still the best book on investing. It has the only three ideas you really need:
1) Chapter 8—The Mr. Market analogy. Make the stock market serve you. The C section of the Wall Street Journal is my business broker—it quotes me prices every day that I can take or leave, and there are no called strikes.
2) A stock is a piece of a business. Never forget that you are buying a business which has an underlying value based on how much cash goes in and out.
3) Chapter 20—Margin of Safety. Make sure that you are buying a business for way less than you think it is conservatively worth.—Warren Buffett
1. The bigger the discount to intrinsic value, the lower the risk.
2. The bigger the discount to intrinsic value, the higher the return.
We bought all of our [Washington Post (WPC)] holdings in mid-1973 at a price of not more than one-fourth of the then per-share business value of the enterprise. Calculating the price/value ratio required no unusual insights. Most security analysts, media brokers, and media executives would have estimated WPC’s intrinsic business value at $400 to $500 million just as we did. And its $100 million stock market valuation was published daily for all to see. Our advantage, rather, was attitude: we had learned from Ben Graham that the key to successful investing was the purchase of shares in good businesses when market prices were at a large discount from underlying business values.. . . Through 1973 and 1974, WPC continued to do fine as a business, and intrinsic value grew. Nevertheless, by year-end 1974 our WPC holding showed a loss of about 25%, with a market value of $8 million against our cost of $10.6 million. What we had bought ridiculously cheap a year earlier had become a good bit cheaper as the market, in its infinite wisdom, marked WPC stock down to well below 20 cents on the dollar of intrinsic value—Warren Buffett
Most institutional investors in the early 1970s, on the other hand, regarded business value as of only minor relevance when they were deciding the prices at which they would buy or sell. This now seems hard to believe. However, these institutions were then under the spell of academics at prestigious business schools who were preaching a newly-fashioned theory: the stock market was totally efficient, and therefore calculations of business value—and even thought, itself—were of no importance in investment activities. (We are enormously indebted to those academics: what could be more advantageous in an intellectual contest—whether it be bridge, chess, or stock selection than to have opponents who have been taught that thinking is a waste of energy?)—Warren Buffett
Very few people have adopted our approach. . . . Maybe two percent of people will come into our corner of the tent, and the rest of the ninety-eight percent will believe what they’ve been told (e.g., that markets are totally efficient)—Charlie Munger
8. LOOK FOR LOW-RISK,HIGH-UNCERTAINTY
High risk, low uncertainty
High risk, high uncertainty
Low risk, high uncertainty - is the Dhandho choice - go for it.
Low risk and low uncertainty - is loved by market - avoid these completely.
Always take advantage of a situation where Wall Street gets confused between risk and uncertainty.
9. IT’S BETTER TO BE A COPYCAT THAN AN INNOVATOR.
McDonals, Microsoft are all copycats.
Mutual funds as a group are so large that in aggregate they look like the market. Thus, if there were no trading costs and fees associated with mutual funds, as a group, they’d deliver returns that would match the broad equity market indexes.
Despite our policy of candor, we will discuss our activities in marketable securities only to the extent legally required. Good investment ideas are rare, valuable and subject to competitive appropriation just as good product or business acquisition ideas are. —Warren Buffett
If you invest in a business, you ought to be quite content to get a data point on its valuation once a year.
Buffet
1. Small team (one man team)
2. Invest in business that have been hit by negativity
3. Report to investors only once a year.that is why he gets long term investors, has a permanent moat over his competitors (other fund managers) and leads a relaxed life/career.
If you carefully study the most successful businesses around, you’ll notice that much of it has been lifted and scaled by great executers.
Abhimanyu’s Dilemma— The Art of Selling
An investor ought to be thinking about before entering any stock market chakravyuh:
1. Is it a business I understand very well—squarely within my circle of competence?
2. Do I know the intrinsic value of the business today and, with a high degree of confidence, how it is likely to change over the next few years?
3. Is the business priced at a large discount to its intrinsic value today and in two to three years? Over 50 percent?
4. Would I be willing to invest a large part of my networth into this business?
5. Is the downside minimal?
6. Does the business have a moat?
7. Is it run by able and honest managers?
A critical rule of chakravyuh traversal is that any stock that you buy cannot be sold at a loss within two to three years of buying it unless you can say with a high degree of certainty that current intrinsic value is less than the current price the market is offering.
Warren Buffett’s two main rules are:
Rule No. 1: Never lose money.
Rule No. 2: Never forget rule No. 1.
It is very hard to make up the lost non-compounding years. Keep time value of money in mind.
A lot of great fortunes in the world have been made by owning a single wonderful business. If you understand the business, you do not need to own very many of them —Warren Buffett
Really outstanding investment opportunities are rare enough that you should really have a go at it when it comes around, and put a huge portion of your wealth into it. I’ve said in the past you should think of investment as though you have a punch card with 20 holes in it. You have to think really hard about each one, and in fact 20 (in a lifetime) is way more than you need to do extremely well as an investor—Warren Buffett
This idea (of focused value investing) has zero currency in academic circles. Investment managers don’t feel they will make enough money this way. It’s so foreign to them-Charlie Munger
Billy Rose used to say that if you have a harem of a hundred girls, you never get to know any of them very well.The trick is to know a lot about what you own, and you don’t own that many things—Warren Buffett
“few bets, big bets, infrequent bets”
To Index or Not to Index— That Is the Question
As long as there are frictional costs, the vast majority of actively managed assets will underperform the broad indexes. This will always be true. Buying a broad index is a very good option for most investors— it assures them of doing better than most of their peer investors. But we can do even better for two reasons:1. There have always been a small minority of investors and money managers who’ve successfully trounced the broad markets over long periods. These are, byand large, the Dhandho investors. It is worth studying the methods of these investors. If you want to be passive, it is very much worth the effort to find these managers and put your assets with them.2. There are lessons to be learned from the way indexes operate. Incorporating some of these index-like traits in your portfolio is likely to lead to results that are vastly superior to the broad indexes.
Arjuna’s Focus: Investing Lessons from a Great Warrior
Archery is all about being singularly focused on the target. If the archer can’t fixate on just the target, success is likely to be elusive.The best way to learn is to teach.
The Prophet
You give but little when you give of your possessions. It is when you give of yourself that you truly give. For what are your possessions but things you keep and guard for fear you may need them tomorrow? . . . There are those who give little of the much they have—and they give it for recognition and their hidden desire makes their gift unwholesome. And there are those who give and know not pain in giving, nor do they seek joy, nor give with mindfulness of virtue. . . . Through the hands of such as these God speaks, and from behind their eyes He smiles upon the earth. You often say, “I would give but only to the deserving.” . . . Surely he who is worthy to receive his days and his nights is worthy of all else from you. And he who has deserved to drink from the ocean of life deserves to fill his cup from your little stream. See first that you yourself deserve to be a giver, and an instrument of giving. For in truth it is life that gives onto life—while you, who deem yourself a giver, are but a witness—Kahlil Gibran
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