The Dhandho Investor

  • Abhishek Behl
  • India
  • Jan 13, 2012



Most people think that while making investments higher risks are needed to be taken to earn high profits. But this is not true, says US based Mohnish Pabrai, Managing Partner of Pabrai Investment Fund. Pabrai, who once asked Warren Buffet for a job, now follows his mentor’s value-based investment concepts – to make great profits with comparatively lower risks.

Pabrai, who is also the author of ‘The Dhandho Investor’, was in Gurgaon recently  to deliver a lecture at the Management Development Institute, Gurgaon (MDI). He also spoke to Friday Gurgaon, and dwelt on various aspects of value investing; and what investors could do to maximize their profits – while ensuring the eggs are spread in different baskets.

As per his Dhandho framework, Pabrai does not believe in taking high risks to make profits. For him following a low risk strategy is the best possible way to make money in stocks; and not to burn one’s fingers playing a high stakes game. And this was the advice given by him to MDI students, when he said that investors should learn to think like businessmen, and invest like the Gujarati Patels.

He believes that investing in existing businesses that are simple, and do not move very fast, is an ideal way to wealth. To Indians, he suggests buying stocks of companies that sell products being used in daily life. “Take into consideration products and brands that you use daily. Know about the companies, their past, the management and the sector in which they are operating. Once you do this, you will be fairly confident to assess a business,” he told Friday Gurgaon.

Another winning strategy as per his Dhando framework, is to invest in stocks of distressed companies. This should be done because human psychology plays an important role in the stock market; and sometimes good stocks are dumped  – leading to low valuations.

An important facet of the Dhandho Framework is to spread the arbitrage as wide and as long as possible, suggests Pabrai. This helps in earning a high return on invested capital, with a low level of risk – but one must remember that arbitrage spreads can eventually disappear, he adds.

A surprising suggestion made by the US based investor is to put the bets on clones, rather than going for innovators. Good cloners are great businesses, as people behind these are able to repeatedly lift and scale the work of the innovators, he says.

Pabrai also told Friday Gurgaon that while investing in a stock, a person should think and act like a businessman. “One must understand the nuances of a business, to make profitable investments”, he says; while adding that he learnt a lot while working with his father in Mumbai, during his teenage years.

His father was a serial entrepreneur, and always involved him in various businesses he set up from time to time. “It was with him that I learnt the real meaning of cash flow, capitalization, about maintaining books, and keeping oneself steady despite the pressure”, reveals Pabrai. He is happy that his book’s pirated version is being sold on pavements in Mumbai.

Indian companies need to share information with the investors, to make the markets more transparent and friendly – is his suggestion to make stocks more attractive as an investment option. The government must also play its part in improving the regulatory environment, he concludes. 


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